"Never time the market" vs. lump sum investment

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AlohaJoe
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Re: "Never time the market" vs. lump sum investment

Post by AlohaJoe »

CarpeDiem22 wrote: Thu Jun 21, 2018 11:30 pm
CyberBob wrote: Thu Jun 21, 2018 9:04 am Vanguard has a paper which may help in your situation, as it looks to answer the question How might an individual who receives a $1 million windfall approach the decision of investing those funds immediately versus dollar-cost averaging the investment over time?
I would have loved to see how DCA vs LSI compare when measured against starting P/B. Very informative paper, nonetheless. Thanks.
Google for "Dollar-Costing Averaging Using the CAPE Ratio: An Identifiable Trend Influencing Outperformance" by Jon Luskin from the Journal of Financial Planning January 2017. The paper is a bit weird though, they do DCA over a 15-year period which....I don't know anyone who is even considering that as an option. It also has all the same issues that every other study using CAPE has: CAPE doesn't have a mean, it doesn't mean revert, it hasn't been "right" for 25 years, results are overstated due to overlapping data, etc.

Their final recommendation is:
Therefore, if market valuations are above 18.6, an adviser should consider DCA for its superior ability to generate wealth
They admit that it hasn't worked since the mid 1980s but has the usual CAPE-apologist explanation:
This study also showed that during the tech bubble mere above-average valuations (CAPE ratio of 21 to 26) climbed even higher amidst the irrational exuberance of investors (Shiller 2000). It was the process of moving from an already high to an even higher valued market that made for the underperformance of DCA during that period
JustinR
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Re: "Never time the market" vs. lump sum investment

Post by JustinR »

Let's say you had a million dollars invested in a Roth IRA (this isn't realistic, it's just to remove tax out of the scenario). You can, today, take it all out of the market and DCA back in over a year.

Would you do that?

Of course not, because it doesn't make any sense.

DCA is not only a losing strategy, it doesn't make any logical sense in the first place. It's a mental trick that doesn't accomplish anything.

Invest it all in at once.
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danielc
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Re: "Never time the market" vs. lump sum investment

Post by danielc »

bonzai wrote: Thu Jun 21, 2018 8:07 am
  • What are your thoughts about his?
  • Am I making some mistake or do you agree that for a large one-lump-sum investment, it does make sense to time the market?
  • If it does make sense, do you have any practical advise as to how to do this - to detect a crash (and not a single day lapse), and quickly-enough perform a buy of ETF/MT?
  • I think it is a very bad idea.
  • Yes, I think that your suggest is a mistake. No, I do not agree that it makes sense to time the market. You'll fail
What I recommend is that you stash the money in a safe place for 1 month. Spend that month reading some books like the Four Pillars of Investing. Then put your money in diversified low-cost index funds following a stock vs bond allocation that matches your risk tolerance. Since it is apparent that you have unrealistic expectations of how the market behaves, I think you should be relatively conservative.
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FOGU
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Re: "Never time the market" vs. lump sum investment

Post by FOGU »

retiredjg wrote: Thu Jun 21, 2018 9:33 am
bonzai wrote: Thu Jun 21, 2018 9:02 am The asset allocation I am interested in is 100% equity....
You say you have no experience so you cannot possibly know what it will feel like for your (let's call it) $1 million to shrink to about $500k over 6 months or so and stay in that neighborhood for a year or so.

It is devastating. Many call it "gut wrenching". It can gnaw at you day and night.

You think you can gut it out. No big deal. Many people do think that. It can't be that bad.

Well, yes it can be that bad and worse. A gut wrench that goes on day after day for month after month takes a toll on a person and all the relationships that person has. Happiness and health are affected. Families are affected. Marriages are affected. Work life suffers. And all of this is unnecessary because you have absolutely no need to invest your money at 100% stocks.

You should consider your need to take risk. It is probably very low because this amount of money puts you way ahead or wherever you actually need to have saved at this point in your life.

You should consider your ability to take risk - something we know nothing about because all we know is you don't need it for 10 years.

Very lastly, you should consider your willingness to take risk. Your willingness seems high, but I think that is really just a lack of experience talking. It seems like a walk in the park so you are willing to do it.


Here's an idea you will not like, but you should consider it anyway. Try to keep an open mind. It is actually an ideal choice for a person in your situation.

Invest now at about 60% stocks and 40% bonds. As you get experience (years, not months) you will see how the market goes up and down and what it feels like to you. If you are lucky enough to experience a real crash, when it is over you will know for sure whether 100% stocks is a good place for you to be. If it is, go there.

If there is no crash for many years, you will at least see how things work and how you react to it. You will have better judgement about what your asset allocation (stock to bond ratio) should be.

Somehow you have a nice sum to do something with. Don't get in over your head. Test the water a little and find out just how deep it is before diving in head first.

An inexperienced person jumping in with a 7 figure sum at 100% equities lack wisdom.
That part right there is the paradox that gnaws.

If you need to take the risk, it means you need the money the risk is designed to generate, which means you can't afford to lose the principal or any substantial portion of it, which means you probably shouldn't be gambling with it in the first place. So your need to take the risk seems to be the very thing that counsels against doing it.

If you have the ability to take risk, it means you can afford to lose the principal or a substantial portion of it, which means you have enough and going for more is what? Simple greed? Or I suppose an ability to take risk could be a function of time horizon, and not necessarily the size of the pile.

Willingness to take risk seems very much a function of personality. Now, hold my beer and watch this!
retiredjg
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Re: "Never time the market" vs. lump sum investment

Post by retiredjg »

FOGU wrote: Sun Jun 24, 2018 6:46 am That part right there is the paradox that gnaws.

If you need to take the risk, it means you need the money the risk is designed to generate, which means you can't afford to lose the principal or any substantial portion of it, which means you probably shouldn't be gambling with it in the first place. So your need to take the risk seems to be the very thing that counsels against doing it.

If you have the ability to take risk, it means you can afford to lose the principal or a substantial portion of it, which means you have enough and going for more is what? Simple greed? Or I suppose an ability to take risk could be a function of time horizon, and not necessarily the size of the pile.

Willingness to take risk seems very much a function of personality. Now, hold my beer and watch this!
I found it paradoxical at first too, but I'm OK with it now.

While all three factors should be considered, not every one is a limiting factor. Only willingness and ability create limits and of the two, ability is primary. There is always at least one limiting factor in play in a decision. The other two factors are always secondary to it and must be ignored if contrary to the limiting factor.

One must first have the ability to take risk. Then the willingness to take risk. Whether one needs to take risk is a distant third. That's how I see it anyway. :happy
pkcrafter
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Re: "Never time the market" vs. lump sum investment

Post by pkcrafter »

I suggested DCA only because the OP wanted to wait until there was a market drop. Why? Because he felt the current market was too high. That is a psychological block and DCA is really one way to get around that sort of block.

From Vanguard's paper:
But if the investor is primarily concerned with
minimizing downside risk and potential feelings of regret (resulting from
lump-sum investing immediately before a market downturn), then DCA may
be of use.
Of course, any emotionally based concerns should be weighed
carefully against both (1) the lower expected long-run returns of cash
compared with stocks and bonds, and (2) the fact that delaying investment
is itself a form of market-timing.
I do not agree that DCA is a form of timing because it is created on pre-selected entry points and not market conditions.

After posting the DCA suggestion the OP said he doesn't like DCA, so his only alternative is to invest everything now.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
CarpeDiem22
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Re: "Never time the market" vs. lump sum investment

Post by CarpeDiem22 »

AlohaJoe wrote: Sat Jun 23, 2018 9:47 pm
CarpeDiem22 wrote: Thu Jun 21, 2018 11:30 pm
CyberBob wrote: Thu Jun 21, 2018 9:04 am Vanguard has a paper which may help in your situation, as it looks to answer the question How might an individual who receives a $1 million windfall approach the decision of investing those funds immediately versus dollar-cost averaging the investment over time?
I would have loved to see how DCA vs LSI compare when measured against starting P/B. Very informative paper, nonetheless. Thanks.
Google for "Dollar-Costing Averaging Using the CAPE Ratio: An Identifiable Trend Influencing Outperformance" by Jon Luskin from the Journal of Financial Planning January 2017. The paper is a bit weird though, they do DCA over a 15-year period which....I don't know anyone who is even considering that as an option. It also has all the same issues that every other study using CAPE has: CAPE doesn't have a mean, it doesn't mean revert, it hasn't been "right" for 25 years, results are overstated due to overlapping data, etc.

Their final recommendation is:
Therefore, if market valuations are above 18.6, an adviser should consider DCA for its superior ability to generate wealth
They admit that it hasn't worked since the mid 1980s but has the usual CAPE-apologist explanation:
This study also showed that during the tech bubble mere above-average valuations (CAPE ratio of 21 to 26) climbed even higher amidst the irrational exuberance of investors (Shiller 2000). It was the process of moving from an already high to an even higher valued market that made for the underperformance of DCA during that period
Thanks. A bit too complicated for my liking. Their results are in line with what I was expecting, but with a 15-year DCA period, I don't know how. For such a long DCA period, I would have expected LSI to outperform more often than not.
Skierajs
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Re: "Never time the market" vs. lump sum investment

Post by Skierajs »

This might interest you: https://www.bloomberg.com/view/articles ... his-market

I think the sample size is a bit small but in this scenario when PE > 32 lump sum still won over 12 month DCA 60% of the time. However, the standard deviation for the lump sum group was almost double, and the average loss when there was an actual loss in principal was also nearly double for the group of lump sum simulations with a loss at 12 months.

I’m actually in a similar boat and decided to DCA in because I find it less stressful in the current market. I just set up an automatic investment plan to invest weekly (I know, lots of investment lots to keep track of). That’s guaranteed to get me in no matter what and gives me the opportunity to lump sum in if there’s a major drop. You just have to decide what you’re comfortable with and what will give you less regret if it turns out to be sub-optimal. I.e. would you be more upset missing out on 10% of gains due to a slower entry or seeing a 10% drop soon after investing it all at once?
JonM
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Re: "Never time the market" vs. lump sum investment

Post by JonM »

Hi

The question, what will make you stay in the market and make you sleep well?

Vanguard has made several studies on Dollar Cost Averaging (DCA) vs Lump sum investing. viewtopic.php?t=216498

In those studies, Lump sum has a small advantage over DCA. However, I don't know many that can lump sum invest a 7 figure number and see the investment fall by 25% in the following months. In that regard, DCA is more forgiving.

We all know what produces the most amount of money, i.e. "what is rational". But we are not rational beings, we are human, and being human means sleeping well at night.

You can do either way and do well over time. The important thing is sticking with your decision.

The best portfolio is the one you stick with :)
blastoff
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Re: "Never time the market" vs. lump sum investment

Post by blastoff »

You could do something like invest half right now and then dollar cost average the rest.

There's no need to make it complicated, but if it helps in execution, then it can be worth it.

Whatever you decide I strongly advocate writing down what you are going to do now - before you do it.
3funder
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Re: "Never time the market" vs. lump sum investment

Post by 3funder »

What do you mean by 100% stocks? US stocks? International stocks? I think it makes a difference, particularly when it comes to current valuations.
Global stocks, US bonds, and time.
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WestUniversity
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Re: "Never time the market" vs. lump sum investment

Post by WestUniversity »

bonzai wrote: Thu Jun 21, 2018 8:07 am Hi,

I understand the concept of "Never try to time the market" - however, in my particular situation I believe it's not applicable - and would like to hear what you have to say about it. I have zero experience in investing, but I'm a quick learner and I intend to begin soon.

My situation is - I have a 7 figure sum to invest, at a single time - and I think the best way to do it, is to somehow wait for the next "market crash" (which seems to happen every few years?) - understand when I'm in this situation, and then perform the buy.

Other than that - I plan on making smaller monthly investments - in which case I agree with the "Never try to time the market" concept fully and can perform such investments automatically / without waiting on a periodic basis.

  • What are your thoughts about his?
  • Am I making some mistake or do you agree that for a large one-lump-sum investment, it does make sense to time the market?
  • If it does make sense, do you have any practical advise as to how to do this - to detect a crash (and not a single day lapse), and quickly-enough perform a buy of ETF/MT?
Why not dollar cost average your funds into the market, i.e. over the next several months invest a predetermined fixed amount each week or each month based upon your asset allocation...
Last edited by WestUniversity on Mon Jun 25, 2018 7:17 am, edited 1 time in total.
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knpstr
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Re: "Never time the market" vs. lump sum investment

Post by knpstr »

bonzai wrote: Thu Jun 21, 2018 8:07 am
  • What are your thoughts about his?
  • Am I making some mistake or do you agree that for a large one-lump-sum investment, it does make sense to time the market?
  • If it does make sense, do you have any practical advise as to how to do this - to detect a crash (and not a single day lapse), and quickly-enough perform a buy of ETF/MT?
It does not make sense to time the market.
The right thing to do is just invest it all and ignore what happens. Let the market do what it wants.
The next best thing to do would be to break up the lump sum and invest some each month regularly until it is all invested.
I would advise against trying to "wait for the crash". Even when things do crash, how do you know when it is the bottom and time to invest?
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
ncbill
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Re: "Never time the market" vs. lump sum investment

Post by ncbill »

Not clear how soon the OP wants to retire, but I'd would follow the "rising equity glide path" model were a 7-figure lump sum to drop into my lap.

I'm old enough that I'd want to use the above approach to mitigate sequence of return risk (SORR)
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bonzai
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Re: "Never time the market" vs. lump sum investment

Post by bonzai »

retiredjg wrote: Thu Jun 21, 2018 9:33 am
bonzai wrote: Thu Jun 21, 2018 9:02 am The asset allocation I am interested in is 100% equity....
You say you have no experience so you cannot possibly know what it will feel like for your (let's call it) $1 million to shrink to about $500k over 6 months or so and stay in that neighborhood for a year or so.

It is devastating. Many call it "gut wrenching". It can gnaw at you day and night.

You think you can gut it out. No big deal. Many people do think that. It can't be that bad.

Well, yes it can be that bad and worse. A gut wrench that goes on day after day for month after month takes a toll on a person and all the relationships that person has. Happiness and health are affected. Families are affected. Marriages are affected. Work life suffers. And all of this is unnecessary because you have absolutely no need to invest your money at 100% stocks.

You should consider your need to take risk. It is probably very low because this amount of money puts you way ahead or wherever you actually need to have saved at this point in your life.

You should consider your ability to take risk - something we know nothing about because all we know is you don't need it for 10 years.

Very lastly, you should consider your willingness to take risk. Your willingness seems high, but I think that is really just a lack of experience talking. It seems like a walk in the park so you are willing to do it.

Here's an idea you will not like, but you should consider it anyway. Try to keep an open mind. It is actually an ideal choice for a person in your situation.

Invest now at about 60% stocks and 40% bonds. As you get experience (years, not months) you will see how the market goes up and down and what it feels like to you. If you are lucky enough to experience a real crash, when it is over you will know for sure whether 100% stocks is a good place for you to be. If it is, go there.

If there is no crash for many years, you will at least see how things work and how you react to it. You will have better judgement about what your asset allocation (stock to bond ratio) should be.

Somehow you have a nice sum to do something with. Don't get in over your head. Test the water a little and find out just how deep it is before diving in head first.

An inexperienced person jumping in with a 7 figure sum at 100% equities lack wisdom.
What you wrote makes a hell of a lot of sense, thank you for taking the effort to do this reality check.
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bonzai
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Re: "Never time the market" vs. lump sum investment

Post by bonzai »

Sandtrap wrote: Thu Jun 21, 2018 9:54 am This might help you decide.

Read About Bob, The Worst Market Timer
What happens if you only invested at market highs?
http://awealthofcommonsense.com/2014/0 ... ket-timer/

Investing Behavior Pitfalls
https://www.bogleheads.org/wiki/Behavioral_pitfalls
Thank you.

Bob, The Worst Market Timer - can be understood in two ways (not mutually exclusive):
1. In the long term, investing in 100% equities still makes sense - but you have to be an emotional rock to handle the crashes
2. No matter when you invest, no sense in timing the market, as it eventually always goes up

I'm going with #2 :)
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Tamarind
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Re: "Never time the market" vs. lump sum investment

Post by Tamarind »

Buying as soon as the money is available to be invested is the best way to avoid the psychological and financial pitfalls of timing. Sometimes that means small amounts like my monthly transfer of $458 to my Roth IRA. Sometimes it might be 7 figures.

Since you have some lead time, think hard about the purpose of this money and what your AA should be once your portfolio grows by that amount. Commonly AA changes as your need to take risk is reduced. Does this 7 figure amount arriving reduce your need to take risk? I agree strongly with posters above that worries about crashes are sign that the AA may not be at the correct "sleep well at night" level.
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Re: "Never time the market" vs. lump sum investment

Post by pkcrafter »

Actin wrote: Sat Jun 23, 2018 7:46 pm Just because something is mathematically correct doesn't mean it is the best choice.

I remember how frustrating it was when I first started buying index funds a decade ago and I lost money everyday the first week. I could only imagine how someone who lump sum invested 100k+ at the beginning of 2008 felt by the summer

Most beginners will be more comfortable with DCA vs lump sum investing, because no matter how rational you are, those red numbers will always get an emotional response on some level.
What happened to the new investor who dollar cost averaged over the 12 months of 2007?

Paul
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randomizer
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Re: "Never time the market" vs. lump sum investment

Post by randomizer »

Nope. Waiting is for people who can see the future, and nobody can. If you can’t stomach that, maybe your allocation is too aggressive.
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HenrysPlan2
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Re: "Never time the market" vs. lump sum investment

Post by HenrysPlan2 »

I think Dolar average for a year to wait for crash is good. meaning if any crash more than 20% will immediaately all in
MikeG62
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Re: "Never time the market" vs. lump sum investment

Post by MikeG62 »

bonzai wrote: Thu Jun 21, 2018 8:07 am
...My situation is - I have a 7 figure sum to invest, at a single time - and I think the best way to do it, is to somehow wait for the next "market crash" (which seems to happen every few years?) - understand when I'm in this situation, and then perform the buy.
OP, did you buy in late December 2018? If not, why not?

That’s the problem with waiting for the crash. No one rings a bell when we hit the bottom. Usually things are so bleak in the market that people aren’t looking to buy and certainly not invest a huge lump sum.

If you follow this path my bet is you’ll be sitting on the sidelines for a very long time.

I’d suggest you DCA in over a period of time (even a protracted one).
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Earl Lemongrab
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Re: "Never time the market" vs. lump sum investment

Post by Earl Lemongrab »

HenrysPlan2 wrote: Tue Feb 26, 2019 7:06 pm I think Dolar average for a year to wait for crash is good. meaning if any crash more than 20% will immediaately all in
What happens at the end of the year if there's no crash? Sell it all and start DCA again? If not, why not?
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Earl Lemongrab
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Re: "Never time the market" vs. lump sum investment

Post by Earl Lemongrab »

MikeG62 wrote: Tue Feb 26, 2019 8:23 pm If you follow this path my bet is you’ll be sitting on the sidelines for a very long time.
There are periodically threads from people who have been waiting since 2015 or whatever. Of course, now the crash they need is REALLY big because the US market is up 40% on a total return basis since then.

Waiting around for a crash is a bad policy. Waiting around at all is a bad policy. Those already invested make the choice every single day to lump sum into the market by not selling everything. Treating cash differently is mental accounting.

Just bite the bullet and invest. Know that it might go against you. I put together my portfolio and brought in a bunch of cash, nicely hitting the high in 2007 before the subsequent crash.

Sure, DCA would have been better. Waiting around until 2009 even better. But I couldn't know that. A core principle of my investing plan is that I have no talent for market timing. Clearly so, as events indicated.
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Raymond
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Re: "Never time the market" vs. lump sum investment

Post by Raymond »

This thread was from June 2018. The OP hasn't logged in to the forum since December 2018.

I hope he decided on a plan (although no decision *is* a decision.)
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CurlyDave
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Re: "Never time the market" vs. lump sum investment

Post by CurlyDave »

bonzai wrote: Thu Jun 21, 2018 8:07 am
...My situation is - I have a 7 figure sum to invest, at a single time - and I think the best way to do it, is to somehow wait for the next "market crash" (which seems to happen every few years?) - understand when I'm in this situation, and then perform the buy...
We just had a short-lived bear market, and are in the process of recovering from it.

IMHO, the "buy at the bottom" boat sailed last month, but we are still in a relatively good buying opportunity spot.

Choose an AA and put it all in. Otherwise you could be waiting a long time.
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Earl Lemongrab
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Re: "Never time the market" vs. lump sum investment

Post by Earl Lemongrab »

CurlyDave wrote: Thu Feb 28, 2019 10:40 am
bonzai wrote: Thu Jun 21, 2018 8:07 am
...My situation is - I have a 7 figure sum to invest, at a single time - and I think the best way to do it, is to somehow wait for the next "market crash" (which seems to happen every few years?) - understand when I'm in this situation, and then perform the buy...
We just had a short-lived bear market, and are in the process of recovering from it.
This "crash every few years" really doesn't hold up to history. The last period I'd call a crash was 2008, at least in US stocks. We've had a number of corrections since then, including December. The problem with waiting is that if you look at the history of a broad US index like the S&P 500, it's easy to find points where an all-time high was reached and, in spite of subsequent bear markets, things have never gone that low again. So you might wait, get your "crash", and still be a loser.
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Fieldsy1024
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Re: "Never time the market" vs. lump sum investment

Post by Fieldsy1024 »

If you can handle bigger swings say 100% in S&P you might want to do that depending on age. I am in my mid 30s and I think when I hit 40 I will start putting Bonds in my AA.....maybe.
StoneFeeler
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Re: "Never time the market" vs. lump sum investment

Post by StoneFeeler »

In the 2012 Vanguard study, the final outperformance of lumpsum over DCA was 1.4% to 2.5% on average. But that percentage is the cumulative outperformance over 10 years, and not annualized. If one gains 2% more by at the end of 10 years, what is the big deal? One might as well be indifferent to either choice and do whichever is mentally comforting.
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BeBH65
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Re: "Never time the market" vs. lump sum investment

Post by BeBH65 »

I don't read the data I the report in the same way.

Moreover:
.An investor who implements a 12-month DCA
strategy is essentially decreasing the overall risk
of the portfolio via the higher allocation to cash
during that period. Does the degree of risk reduction
achieved come at the expense of an even greater
decline in potential returns? To answer this question,
we measured the Sharpe ratios1
for one strategy
versus the other across all possible 12-month
DCA periods.
Despite its lower average ending portfolio values,
a DCA strategy might be more favorable if the risk-
adjusted returns of a DCA portfolio during those first
12 months exceed the risk-adjusted returns of an
LSI portfolio during that period. However, Figure 4,
on page 6, shows that this is not the case. LSI has
provided better returns and risk-adjusted returns,
on average.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
TomCat96
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Re: "Never time the market" vs. lump sum investment

Post by TomCat96 »

bonzai wrote: Thu Jun 21, 2018 8:07 am Hi,

I understand the concept of "Never try to time the market" - however, in my particular situation I believe it's not applicable - and would like to hear what you have to say about it. I have zero experience in investing, but I'm a quick learner and I intend to begin soon.

My situation is - I have a 7 figure sum to invest, at a single time - and I think the best way to do it, is to somehow wait for the next "market crash" (which seems to happen every few years?) - understand when I'm in this situation, and then perform the buy.

Other than that - I plan on making smaller monthly investments - in which case I agree with the "Never try to time the market" concept fully and can perform such investments automatically / without waiting on a periodic basis.

  • What are your thoughts about his?
  • Am I making some mistake or do you agree that for a large one-lump-sum investment, it does make sense to time the market?
  • If it does make sense, do you have any practical advise as to how to do this - to detect a crash (and not a single day lapse), and quickly-enough perform a buy of ETF/MT?
There's research out there that shows lump sum investing beats a dollar cost average more often than not.
Looking back at the moments in my life where I had the opportunity to invest a lump sum or do a dollar cost average, I think I can better reframe the question as not so much which one will give the better return, but what emotional factors are involved that are influencing my decision.

Let's start simple. Which is better Lump Sum vs DCA.
Answer: Lump Sum. Done. Go about your life then.

But you probably knew that making this posting. You have a misgiving, a misgiving that research has shown tends to lose more often than it wins.

Personally, if I had a large lump sum relative to the rest of my net worth, I would DCA it, even at the expense of potentially greater gains in the long run. I have done this in the past, and usually the way its worked out is I'll start off DCA-ing, and then feel confident enough to throw the whole thing in there. The issue is if I had a large lump sum, large relative to the rest of my net worth, I would just feel awful...totally awful if within a week of me entering the market, the whole investment came crashing down.

That would make me lose sleep. It would fill me with regret. But that's not really a logical point is it? There is a bit of a gap between which grows better in the long run (DCA vs Lump Sum, answer Lump SUM) and which one will help me sleep at night. If you're positing the former question to help you address the latter, you're going to do things like post questions you already know the answer to.

What this question is, is really a form of risk tolerance, and there's no shame in accepting that you don't want to take the risk of losing sleep.

I'm personally ok with that limitation on myself. In fact to ignore it, is to ignore your own personal tendencies--a risk that shouldn't be ignored when the strategy demands you stay the course.
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Re: "Never time the market" vs. lump sum investment

Post by supernova »

If you're that worried about it, DCA it in over a few year period. Like $100k a quarter for 3 years (And put the rest in a mix of treasuries and FDIC insured high-yield savings).

Yeah, you'll potentially miss out on gains, but if it helps ease your anxiety, it's worth it.
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bertilak
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Re: "Never time the market" vs. lump sum investment

Post by bertilak »

I look at it this way...

DCA may make you feel you are being careful and it may help you temporarily avoid a sudden loss. It might ease you past a nervous period.

But, you are STILL subject to the same sudden loss after the DCA period is up. In the meantime some of your money (on average, half) has been sitting there idle (uninvested) and not working for you.

Just remember, DCA has no predictable effect on your investments other than you cannot make money if you are NOT invested and DCA is simply a way to temporarily avoid being invested.

BUT, as long as your DCA period is not too long it is not a big mistake as in the long run your investments will be about the same.
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Re: "Never time the market" vs. lump sum investment

Post by Dolcetto »

I've thought about this. What if I receive a windfall?

1. I would leave the money in cash and sit on it for at least 6 months.
2. During that time I would determine my goals for the money. Do I want to spend some of it on a lifestyle change now that would contribute toward a more economical future (i.e. buying/building a modest house instead of renting crappy apartments)?
3. I would then figure out what amount of cash I wanted to keep on hand and what sort of asset allocation that I should invest the rest in, given my goals.
4. I would definitely pay a very skilled fee-based financial advisor a few thousand (maybe $10,000 even) to assess my plan and make sure it's sound. The fee is worth it. I may talk to a skilled psychotherapist too, and ask him or her to assess whether I am behaving rationally.
5. I would execute what I had planned and probably invest monthly for six months to soften any potential market swings (dollar cost averaging).

I suspect that I am in a different financial situation than you and have different lifestyle desires. Candidly, if I could put $1.5MM in the bank, I would live a $50k/year lifestyle and not work much or at all.

Edit: I realize that much of the above is somewhat tangential to the original question. To answer the question more directly: Yes, I would probably DCA for something like six months, but, more importantly, I would seek professional help with that amount of money and would wait six months before doing anything at all with it.
“Wealth consists not in having great possessions, but in having few wants.” —Epictetus
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bonzai
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Re: "Never time the market" vs. lump sum investment

Post by bonzai »

Hi all,

Just to update - despite all of the opinions against “timing” I did think, that market would drop (due to world politics situations) - meaning I did speculate, and I did time the market - in December 2018 I invested half of my sum and it’s currently up 16%.

Although I do understand the sound logic of why it’s not a good idea, in these turbulent times I think that for big sums like mine it’s better to wait for a “crash” while the money is in the bank account and seize the opportunity when it’s there, than to invest it blindly - of course this is a guess, I’m aware of this, but I think/hope it’s an educated one :) my last (and first) investment certainly supports it.
MikeG62 wrote: Tue Feb 26, 2019 8:23 pm
bonzai wrote: Thu Jun 21, 2018 8:07 am
...My situation is - I have a 7 figure sum to invest, at a single time - and I think the best way to do it, is to somehow wait for the next "market crash" (which seems to happen every few years?) - understand when I'm in this situation, and then perform the buy.
OP, did you buy in late December 2018? If not, why not?

That’s the problem with waiting for the crash. No one rings a bell when we hit the bottom. Usually things are so bleak in the market that people aren’t looking to buy and certainly not invest a huge lump sum.

If you follow this path my bet is you’ll be sitting on the sidelines for a very long time.

I’d suggest you DCA in over a period of time (even a protracted one).
Rus In Urbe
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Re: "Never time the market" vs. lump sum investment

Post by Rus In Urbe »

As an investor who has been in the game a couple of decades, I've ridden the roller coaster of the Tech Crash (2001) as well as the Great Recession (2008) and the Great Recovery. And retiring in December. Thanks John Bogle, Albert Einstein, and many Bogleheads for keeping us steady on the tiller as our wealth has slowly and steadily accumulated. :moneybag :moneybag :moneybag :moneybag :moneybag

Here is what I've observed over the decades: A major problem with market timers is not only that they can't "call the bottom." It is that once the market hits the skids, all media are full of messages like "this time it's different!" and "the markets won't recover for decades!" It's positively deafening. All the pundits harp on how "all the rules have been broken!" and "this is unlike any other crash before it!" and.....YAWN.

And, in the midst of all that, the market timer is REALLY, TRULY going to tune out all that noise, and put all the chips in?
REAAAALLLY? :oops:

Nah. Never happens. The market timer (whose motivations are unmanaged and overweening Fear and Greed) is now absolutely terrified, still holding onto the stash and waiting for the bottom, watching for the market to drop more.

And as we know from past dips and troughs, recoveries come with one-day leaps of hundreds of points. Look at the research. Miss those very few (completely unpredictable) days of market recovery and you've missed the whole enchilada.

The old truism is truly truly true: it's not timing the market, it's time IN the market.
I'd like to live as a poor man with lots of money. ~Pablo Picasso
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Re: "Never time the market" vs. lump sum investment

Post by msk »

Because of my tax residency, abroad in an obscure country, I have nil concerns about tax harvesting or capital gains tax, etc. I have been dabbling in stocks since the early 1980s but with a large fraction in SPY (=SP500) and BRK (=Berkshire Hathaway). The dot.com boom tempted me into Nasdaq hi-techs (QQQ) but a 60% quick fall yanked me back to SPY/BRK. Now, if I subscribe to DCA, I should sell everything today and DCA back. Trading out/in cost is trivial since there are no tax implications. Or should I DCA out and then DCA back in? With what frequency? Every 12 months? Dumb question, dumb answers. Just lump sum in and stay there, forever :moneybag

My one market-timing guilt: Every time the market (SP500) drops by 30% from a recent peak I plan to buy one-year Calls, on margin. Another 10% drop to 40% down, buy more Calls, etc. Over the past 40 years this did work well for me. Perhaps again in the future. Perhaps not. But at least it gives me something interesting to look forward to if and when market panic sets in :mrgreen:
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F150HD
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Re: "Never time the market" vs. lump sum investment

Post by F150HD »

OP doesn't state their age. is retirement next year? or 40 years away? -would help w/ the path to choose. (Haven't read whole thread if it was mentioned later)

December would have been the entry point OP was looking for. At that would still need an asset allocation.
Long is the way and hard, that out of Hell leads up to light.
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RickBoglehead
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Re: "Never time the market" vs. lump sum investment

Post by RickBoglehead »

bonzai wrote: Fri Apr 12, 2019 3:52 am Hi all,

Just to update - despite all of the opinions against “timing” I did think, that market would drop (due to world politics situations) - meaning I did speculate, and I did time the market - in December 2018 I invested half of my sum and it’s currently up 16%.

Although I do understand the sound logic of why it’s not a good idea, in these turbulent times I think that for big sums like mine it’s better to wait for a “crash” while the money is in the bank account and seize the opportunity when it’s there, than to invest it blindly - of course this is a guess, I’m aware of this, but I think/hope it’s an educated one :) my last (and first) investment certainly supports it.

In short, you got lucky.
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OldBallCoach
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Re: "Never time the market" vs. lump sum investment

Post by OldBallCoach »

I deal with players signing contracts and getting 7 to 8 figure bonus payments...what I tell them is this...
Talk with your CPA, lawyer and agent...then talk with the NFLPA they can help you to keep from getting hosed. Until all those boxes are checked tell the team to hold your checks. Then and only then.
1. Put the money into whatever you UNDERSTAND...until you understand it all dont give them a penny.
2. You will be a broke fool in about 4.5 years if you are average.
3. Think LONG LONG Term...only plan to live on the interest generated, bank your game checks and for the love of God retire as soon as you can.
4. 90% of the 'money guys" out there are crooks...NO ONE can time the market correctly all the time, just cant be done. So invest in an intelligent manner and understand that this is your forever money. During forever the market is going to peak and valley. You need to relax and follow the plan.

For the record not many listen to coaches...they watch TV shows like Cramer and thing they know it all. put 60% into VTI and 40% into a decent bond fund and I bet it would beat 99% of the " experts that say they can time the market...
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Re: "Never time the market" vs. lump sum investment

Post by mhadden1 »

bonzai wrote: Fri Apr 12, 2019 3:52 am Although I do understand the sound logic of why it’s not a good idea, in these turbulent times I think that for big sums like mine it’s better to wait for a “crash” while the money is in the bank account and seize the opportunity when it’s there, than to invest it blindly - of course this is a guess, I’m aware of this, but I think/hope it’s an educated one :) my last (and first) investment certainly supports it.
I fear that your discovery of an uncanny market timing ability may have ruined you for life.
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tadamsmar
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Re: "Never time the market" vs. lump sum investment

Post by tadamsmar »

bonzai wrote: Thu Jun 21, 2018 8:07 am Hi,

I understand the concept of "Never try to time the market" - however, in my particular situation I believe it's not applicable - and would like to hear what you have to say about it. I have zero experience in investing, but I'm a quick learner and I intend to begin soon.

My situation is - I have a 7 figure sum to invest, at a single time - and I think the best way to do it, is to somehow wait for the next "market crash" (which seems to happen every few years?) - understand when I'm in this situation, and then perform the buy.

Other than that - I plan on making smaller monthly investments - in which case I agree with the "Never try to time the market" concept fully and can perform such investments automatically / without waiting on a periodic basis.

  • What are your thoughts about his?
  • Am I making some mistake or do you agree that for a large one-lump-sum investment, it does make sense to time the market?
  • If it does make sense, do you have any practical advise as to how to do this - to detect a crash (and not a single day lapse), and quickly-enough perform a buy of ETF/MT?
It does not make sense. There was a logical refutation by Constantinides of your position published way back in 1979:

http://faculty.chicagobooth.edu/george. ... A_1979.pdf

Your premise that you should time the market when you have large sum to invest but you not time the market when you have that same large sum already invested.

But, it turns out that old dollars and new dollars have exactly the same gains and losses in the future when they are invested in exactly the same way.

If you believe that you should time the market in one case, then it follows that you should time the market in the other case.

But Constantinides proof is based on the assumption that removing old money from the market and reinvesting it later involves no fees or tax payments, so you do have some wiggle room on that issue.

Note that Constantinides proof does not prove that you should not time the market with this new money. It just proves that you should be prepared also time the market with money in your tax-deferred accounts if you intend to be logically consistent. First, adopt a set of logically consistent beliefs about market timing, and then act accordingly.
4nwestsaylng
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Re: "Never time the market" vs. lump sum investment

Post by 4nwestsaylng »

livesoft wrote: Thu Jun 21, 2018 11:58 am
vineviz wrote: Thu Jun 21, 2018 11:27 am Because what investors need to hear when they ask this question (which they do almost every day on this board) is not advice about allocation instead of DCA/lump sum: they need the complete answer.

Which, it seems, we agree is something like the following. "Using DCA on a windfall instead on investing it all right away is very likely to cost you money, not make you money. And if you find yourself nervous at the thought of investing your windfall according to a particular asset allocation, you really ought to stop and consider whether that allocation ACTUALLY matches your need, ability, and willingness to take risk."
I don't think that is the complete answer. Studies show that the complete answer is:

Lump Sum historically has outperformed DCA-over-12-months by about 1% to 4% on average, but only about 2/3rds of the time. That is, DCA-over-12-months outperforms Lump Sum about one-third of the time.

Thus, the "cost" to DCA-over-12-months is not that much ... about as much as a single bad day in the market. This is such a small price to pay for peace-of-mind, mental accounting, and insurance against a major drop after a LS investment, that it is probably worth it to some investors.

If one wishes to reduce the "cost" of DCA versus LS, then one can do both with parts of the amount to be invested. For instance, if one takes half (50%) of the money to be invested and Lump Sums it, but DCAs the other 50% over the next 10 months, then the "cost" is like reduced by 50% or just 0.5% to 2%. Furthemore, if one accelerates or shortens the DCA schedule from 12 months to 6 months or 4 months, there is also a reduction in the difference in outcome of LS vs DCA.

There are plenty of other mental-accounting or peace-of-mind or behavioral traps that cost one about 0.5% to 2% of their portfolio value. This LS to DCA decision is just another one of them. Other examples might be not investing tax efficiently or buying Wellesley and/or Wellington in a taxable account or paying 0.3% to Vanguard PAS.

Bottom line: Lump sum investing is not the big win that many people seem to think it is.
I think this is an excellent perspective.
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Re: "Never time the market" vs. lump sum investment

Post by dbr »

4nwestsaylng wrote: Fri Apr 12, 2019 9:36 am
livesoft wrote: Thu Jun 21, 2018 11:58 am

Bottom line: Lump sum investing is not the big win that many people seem to think it is.
I think this is an excellent perspective.
The issue is being miscast when the conversation turns to which one wins. The actual difference is small. The real issue is disabusing people of the idea that there is some secret technique involving DCA that indicates one "should" do it to be a winner. There is no such ingredient. It can also be admitted that a secret that does exist with DCA is that for some people it might mitigate regret. More power to them.

As to the only 2/3 of the time lump sum "wins" it is also true that some fraction of the time not being invested in stocks at all will win over being invested in stocks. The real debate should be focused where it belongs, which is what is the right asset allocation rather than when should one invest.
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09deaconX
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Re: "Never time the market" vs. lump sum investment

Post by 09deaconX »

To underscore the importance of not trying to time the market, play this game 10 times and see how you fare: https://qz.com/487013/this-game-will-sh ... right-now/
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Re: "Never time the market" vs. lump sum investment

Post by boglehat »

Cash is fungible.
Whether today you have $1M in stocks, cash or your desired asset allocation, the answer is the same -> invest it all into your target allocation, today.

Put another way, if you received a $1M windfall already magically invested into your desired asset allocation, would you liquidate it to cash, and dollar-cost-average it into the market / wait until the next market downturn? I'd guess the answer for most of us is no. This is the same scenario as receiving $1M in cash, and immediately investing it into your target asset allocation, which is what I'd do.

From a more human perspective, using cold-hearted, robotic logic for these things allows me to not regret my choices, since technically I'm not even choosing to begin with. This helps me stay the course, which is where most of our returns will come from.
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tadamsmar
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Re: "Never time the market" vs. lump sum investment

Post by tadamsmar »

Tamalak wrote: Thu Jun 21, 2018 8:36 am If it were a good idea to wait for a market crash before investing, then it would be a good idea to sell CURRENT investments and wait for a market crash before re-investing.

We 'buy' our portfolios every day by keeping them invested.

If the market drops 20%, you lose 20%. It doesn't matter whether you've been invested for 10 years or 10 seconds. The loss is the same. It doesn't FEEL the same (it's a lot more frustrating if you've been invested for 10 seconds!), but it is the same.
George Constantinides published this argument in 1979:

http://faculty.chicagobooth.edu/george. ... A_1979.pdf

That put the issue to rest, there was no valid financial argument that can be made in favor of investing a lump sum differently from investing old money in a tax-deferred account with no transaction costs. This is true regardless of whether marking timing is a bad idea or a good idea.

This is a good paper on the contemporary thinking about the concept of DCAing of a lump sum:

https://www.researchgate.net/profile/Me ... ace4bb.pdf
WhiteMaxima
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Re: "Never time the market" vs. lump sum investment

Post by WhiteMaxima »

Investment is about taking emotion out. Lump sum, DCA are all good approaches. Let do this: Lump sum 50%, then DCA rest cross 24 months period.
JustinR
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Re: "Never time the market" vs. lump sum investment

Post by JustinR »

WhiteMaxima wrote: Fri Apr 12, 2019 10:35 am Investment is about taking emotion out. Lump sum, DCA are all good approaches. Let do this: Lump sum 50%, then DCA rest cross 24 months period.
If you were to "take all emotion out" the only answer is lump sum.

DCA is purely emotional. It's not based on any logic, reasoning, or statistics at all.

DCA's emotional appeal to the irrational human mind is literally the only thing it has going for it.
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Blimpalot
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Re: "Never time the market" vs. lump sum investment

Post by Blimpalot »

bonzai wrote: Fri Apr 12, 2019 3:52 am Hi all,

Just to update - despite all of the opinions against “timing” I did think, that market would drop (due to world politics situations) - meaning I did speculate, and I did time the market - in December 2018 I invested half of my sum and it’s currently up 16%.

Although I do understand the sound logic of why it’s not a good idea, in these turbulent times I think that for big sums like mine it’s better to wait for a “crash” while the money is in the bank account and seize the opportunity when it’s there, than to invest it blindly - of course this is a guess, I’m aware of this, but I think/hope it’s an educated one :) my last (and first) investment certainly supports it.
That's awesome. The S&P500 was at 2749.76 the day you made the original post initiating this thread. Today it is higher--it's at 2907.41 as of about 20 minutes ago. Does this mean you are going to sell it all and sit on the sidelines while waiting for the next "crash"?
"Nothing I see can be taken from me."--Tom Marshall
JustinR
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Re: "Never time the market" vs. lump sum investment

Post by JustinR »

bonzai wrote: Fri Apr 12, 2019 3:52 am Hi all,

Just to update - despite all of the opinions against “timing” I did think, that market would drop (due to world politics situations) - meaning I did speculate, and I did time the market - in December 2018 I invested half of my sum and it’s currently up 16%.

Although I do understand the sound logic of why it’s not a good idea, in these turbulent times I think that for big sums like mine it’s better to wait for a “crash” while the money is in the bank account and seize the opportunity when it’s there, than to invest it blindly - of course this is a guess, I’m aware of this, but I think/hope it’s an educated one :) my last (and first) investment certainly supports it.
You know that this is called complete luck and coincidence, right?

Are the times still "turbulent"?

If you're convinced market timing works, you should constantly be selling all the stock you've invested and reinvesting it back in slowly. Over and over.
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