Boglehead moral support for struggling newbie with lump sum

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quiet_morning
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Boglehead moral support for struggling newbie with lump sum

Post by quiet_morning » Sat Feb 25, 2012 8:26 pm

I'm having a lot of trouble not just "staying the course", but "starting the course." Analysis paralysis, etc. I'm hoping for words of wisdom to which I can refer back in moments of doubt.

My situation. I sold my company last summer for (what is for me) a life-changing sum. Fortunately a friend put Swenson in front of me, which lead to Berstein, Malkiel, Bogle and the forum, where I've lurked and learned.

I've got an AA, but couldn't make myself lump sum into it. I invested a little in each asset as a "placeholder" just to get my feet wet. But, now I feel like the market is moving up and it's too expensive; bonds are too expensive; I missed a market low this fall; reading the news makes it worse; blah, blah, etc. I'm paralyzed and I find it most unpleasant.

I think I need to DCA on a planned weekly exchange....I don't know. Something to get me moving. (I am aware that lump summing has highest expected return, but feel I could not stomach immediately the standard deviation to which I signed up w/ my AA.)

I need help. Words of wisdom that I can tape on my wall. Thx.

livesoft
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Re: Boglehead moral support for struggling newbie with lump

Post by livesoft » Sat Feb 25, 2012 8:30 pm

Words of Wisdom: You will lose money. Get over it.
Tape that to the wall.

Once I accepted the fact that I would lose money, then things got quite a lot easier. I was helped by some of the articles at http://www.fundadvice.com/ (they are now on the right-hand side). Here's an article from 2000 that might apply to you: http://www.merriman.com/PDFs/AvoidTheWorstMistakes.pdf
Last edited by livesoft on Sat Feb 25, 2012 8:40 pm, edited 1 time in total.
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baw703916
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Re: Boglehead moral support for struggling newbie with lump

Post by baw703916 » Sat Feb 25, 2012 8:36 pm

The saying I would quote, in its original context, had nothing in particular to do with investing.
The longest journey begins with a single step.
It is better to DCA than to do nothing because of fear.
Most of my posts assume no behavioral errors.

FCM
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Re: Boglehead moral support for struggling newbie with lump

Post by FCM » Sat Feb 25, 2012 9:00 pm

I'm clearly in the DCA camp as opposed to the lump sum camp. I have set up automatic monthly purchases with Vanguard that purchase a set dollar amount in each of the funds in which want to increase a position, using cash from my money market account. That takes the "it's too high" or "I'll wait until it drops some more" emotions out of the decision-making process and, more importantly for me, eliminates the feeling that I made a big mistake if I bought a large position in a fund only to see it drop 5% a few weeks later. DCA is the only way I have ever felt comfortable establishing large positions in funds, even if it takes me 2 or 3 years to do so @ $X per month per fund. At least you could get started that way once you have established your asset allocation. It's easy to establish or make changes to the automatic purchase arrangement with Vanguard by just going on-line.

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baw703916
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Re: Boglehead moral support for struggling newbie with lump

Post by baw703916 » Sat Feb 25, 2012 9:24 pm

FWIW, Here's a thread about an experience I had having a lump sum to invest (or not) at a very "interesting" time.

http://www.bogleheads.org/forum/viewtopic.php?t=24378
Most of my posts assume no behavioral errors.

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desertbandit442
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Re: Boglehead moral support for struggling newbie with lump

Post by desertbandit442 » Sun Feb 26, 2012 10:14 am

This is a plan I used for a lump sum to DCA an inheritance. Take your lump sum and invest over a 5 year period. So if you had a $100,000 lump sum, invest $20,000 a year in the market. I've been in the market since 1982 and have noticed in general the "Santa Claus" effect, where the markets tend to go up in Dec/Jan. So I invest my $20,000 for the year, $2,000 each month, Feb-Nov. The extent of my "market timing," if someone wants to call it that, is not investing in the market in December or January. This also allows my to review my year in December and formulate my plan for the new year in January.

It might not be the "Best" plan, who really knows, but it allowed me to pull the trigger on investing a lump sum.

quiet_morning
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Re: Boglehead moral support for struggling newbie with lump

Post by quiet_morning » Sun Feb 26, 2012 1:28 pm

Thanks all. How do you get over feelings of poor timing? Or guilt of losing to inflation while you DCA?

Default User BR
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Re: Boglehead moral support for struggling newbie with lump

Post by Default User BR » Sun Feb 26, 2012 2:24 pm

Some time back, I got serious about investing. I spent a lot of time reading books and studying model portfolios in them and sites like Merriman and IFA. I devised an investment plan. I reorganized my 401(k) and brought >100k in cash from the sidelines to implement it. This was in the summer of 2007. I don't need to tell you what happened from there.

In spite of that, I would still recommend just doing it. Either lump-sum or a defined DCA. Don't try to outguess the market. Listen to Livesoft. The market will go up. It will go down. Devise an allocation such that you can stomach it when the inevitable happens. That could be in a month, a year, a decade. When my fall took place, I refused to panic. In summer of 2009, I churned over the entire taxable portfolio to harvest the losses. I kept up my investing schedule. I rebalanced according to the ranges my spreadsheet calculates.


Brian

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Index Fan
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Re: Boglehead moral support for struggling newbie with lump

Post by Index Fan » Sun Feb 26, 2012 2:47 pm

If you cannot bring yourself to invest, perhaps your asset allocation needs a second look?

Also, realize that keeping money in cash will mean that money will lose value at today's interest rates. Inflation will eat away at it. Investing will give you a good shot at growing your money instead of watching it dwindle.
"Optimum est pati quod emendare non possis." | -Seneca

vesalius
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Re: Boglehead moral support for struggling newbie with lump

Post by vesalius » Sun Feb 26, 2012 2:48 pm

Here are 3 Swedroe articles on the topic. The trick is to figure out which plan will allow you to take that first step and sleep at night.

Dollar-Cost Averaging: Does It Produce Better Results?
When Dollar-Cost Averaging Makes Sense
When Dollar-Cost Averaging Doesn't Make Sense

and a good article by Rick Ferri on this topic.

4 Rules for Investing a Lump Sum

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Noobvestor
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Re: Boglehead moral support for struggling newbie with lump

Post by Noobvestor » Sun Feb 26, 2012 2:58 pm

Well, I'll give you the other side of it: I got a bit of a lump sum recently and decided to spread it out after careful consideration and weighing both financial and personal factors (mainly, the kind of 'concentration risk' of hitting 'just the wrong time' outweighing the 'out of market' risk on my personal analysis). As of right now, strictly speaking, that hasn't 'worked well' for me, as the cash is losing to the rest.

My allocation is more stock than bond, but either way, it's kind of painful to be on the sidelines, because both are up for the year while I have money sitting in ... cash. Blech. Of course, it could have gone the other way, too, and I know that. But if the (stock and bond) markets are up a lot more by the time I'm scheduled to put that cash in, I might have a difficult time pulling the trigger. I'm pretty sure I can force my hand to hit the button, but it does give me a new up-close perspective on one side of the debate.

So, if you DCA, definitely have a schedule for it so you're not timing the market while you wait. And either way, you might find your decision helps you analyze your feelings about your stock/bond ratio either way. What is most interesting to me personally is that even though stocks are up a lot more than bonds, I don't 'feel' like I 'wish' I had put more in stocks or something - happy to see bonds up a bit too, and looking forward to adding more on all fronts, even if it means a catch-up number on the bond front. What that tells me on a not-so-rational level is that I'm comfortable with my somewhat-high-for-my-age bond allocation and 'missing out on' stock rallies beyond a certain point if it means controlling downside risk.

tl;dr DCA avoids the concentrated right of hitting JUST at the wrong point in the market, but overall it also reduces returns somewhat; thus, it is risk mitigation that you (may) pay a price for or may be rewarded for.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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dratkinson
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Re: Boglehead moral support for struggling newbie with lump

Post by dratkinson » Sun Feb 26, 2012 5:33 pm

Welcome. Congratulations on the sale of your business.

I'm a novice investor so take all advice with a pound of salt. I am still in the accumulation phase, want to invest more NOW, but don't have the money. :)

Senior investors please feel free to correct any misunderstanding/misinformation.



Loss.

It's only a paper loss, unless you sell and make it an actual loss. Your investment will recover with the market, so stay the course.

In the worst case, you can practice a little TLHing (tax loss harvesting) to make your taxes better. In my case, I've been a little disappointed that I've had so few TLH opportunities last year and this.


Timing.

"The best time to invest is when you have the money." Don't remember who said it.

[self-censorship]
If you believe markets aways rise over the long-term, and as I do that they will begin to recover next year, then now is the time to be fully invested... before they recover.
[/self-censorship]

As Buffet reminds us, "...be greedy when others are fearful...".

Do you feel "fearful"? Well, there you go. :)


Bonds.

Yes, they do fluctuate in value, but not by very much. In a really bad year, someone here has noted that stocks can lose ~50-90% of their value, bonds on the other hand lose ~10-15% of their value. So not very much.

In the mean time, those bond funds will continue to throw off the same dividends. And those dividends will rise over time as older bonds expire and are replaced with newer, higher interest bonds.

Expect any bond fund loss to recover over time based on their duration, with increasing distributions during that time.


Interest rate.

Yes, bond funds will lose value as interest rates rise, but I don't foresee that being by much each year. So between a small negative for bond fund value and a small positive for increasing dividends, I see it as being about a wash.

And if you get too nervous, then TLH into shorter duration bonds. I've decided that I probably will not as I want the higher dividends and don't worry too much about a short-term paper loss... unless I really need the TLH. :)


Emergency fund.

If you need your investment to live on, then perhaps you need a much larger EF to help you weather a longer market downturn.


Portfolio.

Post yours and ask the senior investors to double-check yours and your thinking.

With a cool, logical mind, develop your IPS (investment policy statement) detailing what and how you will invest. Then go do it.

When your emotions get the better of you, refer to your IPS and stay the course.

It worked for me.


Financial new media.

It helps if you don't listen too much.



That's all I know.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

KyleAAA
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Re: Boglehead moral support for struggling newbie with lump

Post by KyleAAA » Sun Feb 26, 2012 5:41 pm

I will take a different tact here. If lump summing into your chosen asset allocation now makes you nervous and you would be unable to stomach the standard deviation from it (to use your words), chances are your chosen asset allocation exceeds your risk tolerance. You should seriously consider toning it down a bit. Only you can say what's best for yourself, but your nervousness now bodes poorly for your ability to stay-the-course in the future, should the market tank.

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Re: Boglehead moral support for struggling newbie with lump

Post by jebmke » Sun Feb 26, 2012 5:42 pm

livesoft wrote:Words of Wisdom: You will lose money. Get over it.
Tape that to the wall.

Once I accepted the fact that I would lose money, then things got quite a lot easier. I was helped by some of the articles at http://www.fundadvice.com/ (they are now on the right-hand side). Here's an article from 2000 that might apply to you: http://www.merriman.com/PDFs/AvoidTheWorstMistakes.pdf
add to the taped item: When (not if) you lose money, book it.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Grt2bOutdoors
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Re: Boglehead moral support for struggling newbie with lump

Post by Grt2bOutdoors » Sun Feb 26, 2012 5:48 pm

dratkinson wrote:Welcome. Congratulations on the sale of your business.

I'm a novice investor so take all advice with a pound of salt. I am still in the accumulation phase, want to invest more NOW, but don't have the money. :)

Senior investors please feel free to correct any misunderstanding/misinformation.

See my responses in blue down below.

Loss.

It's only a paper loss, unless you sell and make it an actual loss. Your investment will recover with the market, so stay the course.

Not all investments recover - just ask the folks who "invested" with Madoff.

In the worst case, you can practice a little TLHing (tax loss harvesting) to make your taxes better. In my case, I've been a little disappointed that I've had so few TLH opportunities last year and this.

You can use TLH to the extent that it eliminates gains and take no more than 3,000 in losses on your income tax return.


Timing.

"The best time to invest is when you have the money." Don't remember who said it.

[self-censorship]
If you believe markets aways rise over the long-term, and as I do that they will begin to recover next year, then now is the time to be fully invested... before they recover.
[/self-censorship]

As Buffet reminds us, "...be greedy when others are fearful...".

Do you feel "fearful"? Well, there you go. :)


Bonds.

Yes, they do fluctuate in value, but not by very much. In a really bad year, someone here has noted that stocks can lose ~50-90% of their value, bonds on the other hand lose ~10-15% of their value. So not very much.

Not all bonds are cut from the same cloth. Just ask some folks who got creamed holding junk bonds at one time or another. Not all government bonds are the same, just ask those who held Argentinian government debt until the government defaulted and then offered 30 cents on the dollar to those who were creditors (today International Bond funds are becoming popular again). You can lose your proverbial shirt - caveat emptor!!

In the mean time, those bond funds will continue to throw off the same dividends. And those dividends will rise over time as older bonds expire and are replaced with newer, higher interest bonds.
What happens when older bonds expire and are replaced with newer, lower coupon bonds, like today, hmmm?

Expect any bond fund loss to recover over time based on their duration, with increasing distributions during that time.


Interest rate.

Yes, bond funds will lose value as interest rates rise, but I don't foresee that being by much each year. So between a small negative for bond fund value and a small positive for increasing dividends, I see it as being about a wash.

This is not gospel, just look at the investment professionals who've been burned making prognostications about the outcome for bonds - Bill Gross, anyone?

And if you get too nervous, then TLH into shorter duration bonds. I've decided that I probably will not as I want the higher dividends and don't worry too much about a short-term paper loss... unless I really need the TLH. :)


Emergency fund.

If you need your investment to live on, then perhaps you need a much larger EF to help you weather a longer market downturn.


Portfolio.

Post yours and ask the senior investors to double-check yours and your thinking.

With a cool, logical mind, develop your IPS (investment policy statement) detailing what and how you will invest. Then go do it.

When your emotions get the better of you, refer to your IPS and stay the course.

It worked for me.


Financial new media.

It helps if you don't listen too much.
Agree, tune out the talking heads over at CNBC and all those nice glossy magazines with headlines like "Where to Put Your Money 2012, or Can you ever retire, or What the latest IDK professionals are saying now. (IDK - I Don't Know" :lol



That's all I know.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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grabiner
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Re: Boglehead moral support for struggling newbie with lump

Post by grabiner » Sun Feb 26, 2012 6:32 pm

I would recommend setting up an automatic dollar-cost average, so that it will become an active decision for you not to invest. You can add 10% to your stock holdings every month for six months if 60% is your target allocation to stock. Vanguard, and most other mutual fund companies, will let you set up an automatic investment plan.

This is the investing equivalent of putting your credit card in the freezer, which is a common recommendation for people who need to have a credit card but are tempted to overuse it.
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