I have $100k in savings. Dollar cost averaging or lump sum investment?

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LobsterStrong
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Joined: Thu May 23, 2019 4:19 pm

I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by LobsterStrong » Fri May 24, 2019 3:52 pm

Bogleheads!

Would love some advice.

I have ~$100k sitting in a money market at 2.2%.

I want to get this money into the market and working for me in some low cost funds.

I also have a Wealthfront account with ~$100k already invested at 10 risk tolerance. This account is presumably where I would be looking to move this savings acct money (though I'm open to alternative suggestions!).

I don't need access to this money for at least 10+ years and am looking at it more as vehicle towards Financial Freedom, not short term needs or expenses.

I am getting conflicting advice on which option is best:

A) dollar cost averaging it into the market

or

B) Lump sum investment.

I've heard about some studies that suggest that 70% of the time it's better to lump sum into the market v DCA.

And as much as I am against trying to time the market, it does concern me to lump sum invest $100k into the market the way it is now.

What do you Bogleheaded friends think?

Much appreciated 🙏

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by Thesaints » Fri May 24, 2019 4:03 pm

Investing in installments lowers your expected return and reduces the volatility of your final return, compared to a lump sum investment.
It's kind of easy math.

crossbow
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Joined: Mon Nov 12, 2018 6:47 pm

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by crossbow » Fri May 24, 2019 4:06 pm

You never know whether the market will take a dip or lift. I was in the same position as you when I first started investing, and I went with a 6-month DCA. You could go with a 3 month DCA if that helps you sleep better.

Also, do you have an emergency fund set aside?

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ruralavalon
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Location: Illinois

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by ruralavalon » Fri May 24, 2019 4:26 pm

LobsterStrong wrote: ↑
Fri May 24, 2019 3:52 pm
Bogleheads!

Would love some advice.

I have ~$100k sitting in a money market at 2.2%.

I want to get this money into the market and working for me in some low cost funds.

I also have a Wealthfront account with ~$100k already invested at 10 risk tolerance. This account is presumably where I would be looking to move this savings acct money (though I'm open to alternative suggestions!).
. For funds and location of accounts I usually suggest
1) Vanguard,
2) Fidelity, or
3) Schwab
in that order of preference.

I prefer using traditional mutual funds (rather than ETFs), and Vanguard has by far the largest selection of low expense traditional mutual funds offered anywhere. Both Vanguard and Fidelity have a larger selection of low expense index funds than does Schwab. We have all of our investing accounts at Vanguard, and use only Vanguard index funds.

Vanguard has by far the largest array of no transaction fee ETFS. In addition to its own ETFs Vanguard offers roughly 1800 commission free ETFs of other firms including those of Schwab, State Street (SPDR) and BlackRock (iShares). Kiplinger (07/02/2018), "Vanguard to Ditch Commissions on Most ETFs".

I like Vanguard's mutual structure, Vanguard is owned by the Vanguard funds, has no other shareholders, and so conflicts of interest with shareholders don't exist.

LobsterStrong wrote: ↑
Fri May 24, 2019 3:52 pm
I don't need access to this money for at least 10+ years and am looking at it more as vehicle towards Financial Freedom, not short term needs or expenses.

I am getting conflicting advice on which option is best:

A) dollar cost averaging it into the market

or

B) Lump sum investment.

I've heard about some studies that suggest that 70% of the time it's better to lump sum into the market v DCA.

And as much as I am against trying to time the market, it does concern me to lump sum invest $100k into the market the way it is now.

What do you Bogleheaded friends think?

Much appreciated 🙏
Lump sum or in stages? There is much discussion here about the two approaches. I am in the invest it "all at once" camp. When investing a large chunk of new money, "all at once" works out better about 2/3 of the time. Please see the Vanguard paper, "Dollar-cost averaging just means taking risk later".

Wiki article, "Dollar-cost averaging". “Lump sum investing will always carries a higher expected return, because it immediately moves your funds from asset classes with lower expected returns to ones with higher expected returns. Note that higher expected returns do not guarantee that your actual returns will be higher. According to an investopedia article, studies indicate that lump sum investing has produced higher returns 66% of the time”.

Holding on to cash while you wait for a better time to invest is likely to give you a negative real return net of inflation and taxes. I think it is better to invest in something with the prospect of a positive real return. Market timing (waiting for a good time to buy) is a fool's errand. No one can successfully do that consistently. If you wait for a good day to buy, you will never know if the next day, or the next week, or the next month, or even the next year might be an even better time to buy.

It was always my policy to invest whenever I had extra money available to invest.

Please read this: "What if you only invested at market peaks?"

The compromise solution is to invest part in a lump sum now, and the rest in stages. For example invest 50% in a lump sum now, and invest the other 50% in stages (like an additional 10% on a predetermined date each month for the next 5 months). Don't needlessly agonize over when the best time may be to invest.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by MotoTrojan » Fri May 24, 2019 4:31 pm

Won't you be bummed if the market crawls up 10% slowly over the DCA period and then crashes the day you are fully invested?

If you had carefully saved for 30 years in a 401k and had $2.5M at retirement, would you move it all to cash and then redeploy it via DCA? Of course not. New money is no different, even if I gave you $2.5M today. Every day you don't sell you are deciding to buy, taxes aside.

Topic Author
LobsterStrong
Posts: 14
Joined: Thu May 23, 2019 4:19 pm

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by LobsterStrong » Fri May 24, 2019 4:45 pm

Gosh darn it!

I've been a bogleheads member for less than 24 hours and am already getting more value and solid advice (WITH REFERENCE MATERIAL) than I have anywhere else (though the IWT book has also been hugely impactful).

What I would give to help make personal finance and investing mandatory in high school.

Thank you all so much for helping to quell concerns and get me thinking straight.

Continually blessed to be here.

--

Based on this feedback, I'm thinking I'll:
  • Keep $25k in a MM fund as an emergency fund
  • Lump sum $50k in Wealthfront
  • DCA the remaining $25k over 5 months into Wealthfront
I spoke with a Vanguard Advisor this morning about the possibility of moving funds over with them, which I think I'll do in the next 3-6 months or so. But I want to get the money invested sooner v later.

Please critique my plan :)

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ruralavalon
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Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by ruralavalon » Fri May 24, 2019 5:02 pm

LobsterStrong wrote: ↑
Fri May 24, 2019 4:45 pm
Gosh darn it!

I've been a bogleheads member for less than 24 hours and am already getting more value and solid advice (WITH REFERENCE MATERIAL) than I have anywhere else (though the IWT book has also been hugely impactful).

What I would give to help make personal finance and investing mandatory in high school.

Thank you all so much for helping to quell concerns and get me thinking straight.

Continually blessed to be here.

--

Based on this feedback, I'm thinking I'll:
  • Keep $25k in a MM fund as an emergency fund
  • Lump sum $50k in Wealthfront
  • DCA the remaining $25k over 5 months into Wealthfront
I spoke with a Vanguard Advisor this morning about the possibility of moving funds over with them, which I think I'll do in the next 3-6 months or so. But I want to get the money invested sooner v later.

Please critique my plan :)
That's a reasonable plan, but why wait 3-6 months to start your Vanguard account? Invest this new $75k in a Vanguard account, don't add it to your Wealthfront account.

It can be difficult to unwind and transfer investments at Welathfront. Forum discussions, "Best way to liquidate Wealthfront" and "How do I unwind this Wealthfront mess".
Last edited by ruralavalon on Fri May 24, 2019 5:15 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Thesaints
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Joined: Tue Jun 20, 2017 12:25 am

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by Thesaints » Fri May 24, 2019 5:13 pm

MotoTrojan wrote: ↑
Fri May 24, 2019 4:31 pm
Won't you be bummed if the market crawls up 10% slowly over the DCA period and then crashes the day you are fully invested?

If you had carefully saved for 30 years in a 401k and had $2.5M at retirement, would you move it all to cash and then redeploy it via DCA? Of course not. New money is no different, even if I gave you $2.5M today. Every day you don't sell you are deciding to buy, taxes aside.
That's not why DCA is done.
In its simplest terms: with LS you invest at a single price, with DCA you invest at many different prices. Chances of picking the single worst price are zero and chances of your average price being anywhere near that point strongly reduced.
As such, 5 investments of 15k would be better than one 50k investment and five 5k investments.

MotoTrojan
Posts: 4954
Joined: Wed Feb 01, 2017 8:39 pm

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by MotoTrojan » Fri May 24, 2019 5:29 pm

Thesaints wrote: ↑
Fri May 24, 2019 5:13 pm
MotoTrojan wrote: ↑
Fri May 24, 2019 4:31 pm
Won't you be bummed if the market crawls up 10% slowly over the DCA period and then crashes the day you are fully invested?

If you had carefully saved for 30 years in a 401k and had $2.5M at retirement, would you move it all to cash and then redeploy it via DCA? Of course not. New money is no different, even if I gave you $2.5M today. Every day you don't sell you are deciding to buy, taxes aside.
That's not why DCA is done.
In its simplest terms: with LS you invest at a single price, with DCA you invest at many different prices. Chances of picking the single worst price are zero and chances of your average price being anywhere near that point strongly reduced.
As such, 5 investments of 15k would be better than one 50k investment and five 5k investments.
I understand. If there is a logical reason to DCA new money, then that logic should apply to previously invested money (my 401k example) which nobody would actually do. There are emotional reasons, but using math to justify them is just silly. Again, there is no logically rationale reason to DCA, only emotionally rationale.

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dogagility
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Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by dogagility » Fri May 24, 2019 6:37 pm

Thesaints wrote: ↑
Fri May 24, 2019 5:13 pm
MotoTrojan wrote: ↑
Fri May 24, 2019 4:31 pm
Won't you be bummed if the market crawls up 10% slowly over the DCA period and then crashes the day you are fully invested?

If you had carefully saved for 30 years in a 401k and had $2.5M at retirement, would you move it all to cash and then redeploy it via DCA? Of course not. New money is no different, even if I gave you $2.5M today. Every day you don't sell you are deciding to buy, taxes aside.
That's not why DCA is done.
In its simplest terms: with LS you invest at a single price, with DCA you invest at many different prices. Chances of picking the single worst price are zero and chances of your average price being anywhere near that point strongly reduced.
As such, 5 investments of 15k would be better than one 50k investment and five 5k investments.
Since the market has an upward trajectory over time, the chances of the average price paid/share being higher with DCA vs LS is more than 50%.

People DCA for psychological reasons, not to increase their likely return rate.
Taking "risk" since 1995.

Dottie57
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Joined: Thu May 19, 2016 5:43 pm

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by Dottie57 » Fri May 24, 2019 6:47 pm

OP,

How did you accumulate the cash and why do you want to invest it? How much do you have invested elsewhere?

I have 120k in a MM earning 2%. It has multiple uses : emergency, bathroom remodel, holder for yearly allotment from retirement accounts.

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by Thesaints » Fri May 24, 2019 8:24 pm

MotoTrojan wrote: ↑
Fri May 24, 2019 5:29 pm
I understand. If there is a logical reason to DCA new money, then that logic should apply to previously invested money (my 401k example) which nobody would actually do.
That's the logic of those who have not understood what DCA does and what its benefit is.
There are emotional reasons, but using math to justify them is just silly. Again, there is no logically rationale reason to DCA, only emotionally rationale.
I beg to differ. By investing at several different prices, one avoids the risk of investing everything at the highest one of them.

dogagility wrote: ↑
Fri May 24, 2019 6:37 pm
People DCA for psychological reasons, not to increase their likely return rate.
Which, as it happens, is not why people do DCA. Its benefit is another one.
Thesaints wrote: ↑
Fri May 24, 2019 4:03 pm
Investing in installments lowers your expected return and reduces the volatility of your final return, compared to a lump sum investment.
It's kind of easy math.

miket29
Posts: 105
Joined: Tue Jun 20, 2017 9:07 pm

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by miket29 » Fri May 24, 2019 8:33 pm

LobsterStrong wrote: ↑
Fri May 24, 2019 3:52 pm
Bogleheads!

Would love some advice.

I have ~$100k sitting in a money market at 2.2%.

I want to get this money into the market and working for me in some low cost funds.
Was this money from a lump-sum payout of some sort, or from steady savings? If the latter my advice is to do nothing until you can explain to your own satisfaction why you built up $100K in a MM account rather than investing it along the way, and why the urge now to invest it.

MotoTrojan
Posts: 4954
Joined: Wed Feb 01, 2017 8:39 pm

Re: I have $100k in savings. Dollar cost averaging or lump sum investment?

Post by MotoTrojan » Fri May 24, 2019 10:02 pm

Thesaints wrote: ↑
Fri May 24, 2019 8:24 pm
MotoTrojan wrote: ↑
Fri May 24, 2019 5:29 pm
I understand. If there is a logical reason to DCA new money, then that logic should apply to previously invested money (my 401k example) which nobody would actually do.
That's the logic of those who have not understood what DCA does and what its benefit is.
There are emotional reasons, but using math to justify them is just silly. Again, there is no logically rationale reason to DCA, only emotionally rationale.
I beg to differ. By investing at several different prices, one avoids the risk of investing everything at the highest one of them.

dogagility wrote: ↑
Fri May 24, 2019 6:37 pm
People DCA for psychological reasons, not to increase their likely return rate.
Which, as it happens, is not why people do DCA. Its benefit is another one.
Thesaints wrote: ↑
Fri May 24, 2019 4:03 pm
Investing in installments lowers your expected return and reduces the volatility of your final return, compared to a lump sum investment.
It's kind of easy math.
Then explain to me why it doesn’t make sense to re-DCA your 401K? Money is fungible. Your logic is flawed.

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