How do you avoid bad market timing for lump sum investments?

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tibbe
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How do you avoid bad market timing for lump sum investments?

Post by tibbe » Sat Apr 23, 2016 10:09 am

Lets say I decided to start investing and would like to move into index funds with a lump of cash. I'm not trying to beat the market, but I would like to get the long term market returns.

It seems to me that if I do just a single large purchase, at an unlucky moment, I could end up doing worse than the market. Perhaps we can see this as being "poorly diversified in the time dimension". Is there a strategy for avoiding this "worse than average" outcome (i.e. is there a way to reduce this variance)? I'm guessing the answer could be "spread out your purchases over time", but over how long a time horizon? In addition, if I spread out my purchases for a really long time horizon, say ten years, I'm missing out on a bunch of compound interest.

Just to be clear, this is not a problem if you start from very little cash and save and invest some sum every month. However, this seems to be a problem if you've been saving but not investing for a long time.

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Re: How do you avoid bad market timing for lump sum investments?

Post by tludwig23 » Sat Apr 23, 2016 10:35 am

There is no way to know. If it makes you feel better, dollar cost average, i.e., divide the money up in some convenient way, such as putting in 1/4 of it each quarter over the next year. There are hundreds, if not thousands, of threads on this site about the pros and cons of dollar cost averaging. You can read them if you have trouble falling asleep.
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Toons
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Re: How do you avoid bad market timing for lump sum investments?

Post by Toons » Sat Apr 23, 2016 10:42 am

If your plan is to leave the money "in the market" for decades.
Lump Sum ,
There is no bad time to invest.
Time Not Timing. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Random Walker
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Re: How do you avoid bad market timing for lump sum investments?

Post by Random Walker » Sat Apr 23, 2016 10:56 am

Dollar cost averaging is one solution: fixed amount at regular intervals. Another option well worth learning about is Value Averaging. There is a book titled Value Averaging by Michael Edleson; William Bernstein is a big proponent of this book and this method for investing a large fixed sum. In fact, he wrote the foreword for the book. What I like about this method is that you, the investor (with reasonable assumptions) dictate the goal and the path rather than being completely hostage to Mr Market. Moreover you methodically buy more at low prices and less at high prices. If the market really takes off, you could end up selling to stay on path!
All the above being said, there is always an equity risk premium. So putting fixed amount all in as early as possible can make sense. I agree, if the amount is huge compared to future contributions, and especially at today's fair-generous valuations, you may want to consider DCA or VA.

Dave

https://en.m.wikipedia.org/wiki/Value_averaging

http://www.amazon.com/Value-Averaging-S ... 0470049774

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iceport
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Re: How do you avoid bad market timing for lump sum investments?

Post by iceport » Sat Apr 23, 2016 11:05 am

tibbe wrote:Lets say I decided to start investing and would like to move into index funds with a lump of cash. I'm not trying to beat the market, but I would like to get the long term market returns.

It seems to me that if I do just a single large purchase, at an unlucky moment, I could end up doing worse than the market. Perhaps we can see this as being "poorly diversified in the time dimension". Is there a strategy for avoiding this "worse than average" outcome (i.e. is there a way to reduce this variance)? I'm guessing the answer could be "spread out your purchases over time", but over how long a time horizon? In addition, if I spread out my purchases for a really long time horizon, say ten years, I'm missing out on a bunch of compound interest.

Just to be clear, this is not a problem if you start from very little cash and save and invest some sum every month. However, this seems to be a problem if you've been saving but not investing for a long time.

Welcome tibbe!

You're hitting on a forum nerve here, and will surely be barraged with proof positive that your best course of action is, unequivocally, to invest your huge lump sum immediately. They will surely tell you that you should only "spread out your purchases over time" for psychological reasons (i.e. if you are weak-minded).

[Then again, those same people are often the ones who advise you to never look back after making a lump sum purchase. Presumably, that's also only for psychological reasons. ;-) ]

I see advantages to "spreading out your purchases over time," though I tend to focus on the "diversification of purchase prices" more than the time element. If you could diversify your purchases in an instant, wouldn't that accomplish the same result? Unfortunately, the only way to achieve different purchase prices is to make purchases at different times.

The typical time period is 6 to 18 months.

You might be interested in this article: Do Not Dollar-Cost-Average for More than Twelve Months
"Discipline matters more than allocation.” ─William Bernstein

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Re: How do you avoid bad market timing for lump sum investments?

Post by Leeraar » Sat Apr 23, 2016 11:08 am

By engaging in good market timing?

L.
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Tycoon
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Re: How do you avoid bad market timing for lump sum investments?

Post by Tycoon » Sat Apr 23, 2016 11:09 am

I don't. My plan told me to buy an international fund in 2011. It turned out to be a bad time to buy VINEX. It's recovered, and I'll hold it for many more years; but dang that hurt.
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Re: How do you avoid bad market timing for lump sum investments?

Post by Lobster » Sat Apr 23, 2016 11:11 am

Just had to answer the same question for myself. Of course it's a personal decision, but the links in the Dollar Cost Average page on the wiki helped me get over the hurdle (I ended up entering the market in three chunks over a couple months after learning that lump sum gives you best expected return).

https://www.bogleheads.org/wiki/Dollar_cost_averaging
Specific links in the wiki that helped me get over the hump:
https://pressroom.vanguard.com/nonindex ... raging.pdf
http://awealthofcommonsense.com/2014/02 ... ket-timer/

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JMacDonald
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Re: How do you avoid bad market timing for lump sum investments?

Post by JMacDonald » Sat Apr 23, 2016 11:13 am

tibbe wrote:It seems to me that if I do just a single large purchase, at an unlucky moment

Well, an unlucky moment was September, 2008, when the last big crash occurred. See this Morningstar chart for the Vanguard Total Stock Market Fund to see how you would have done if you had invested that month.

http://quotes.morningstar.com/chart/fun ... ture=en-US
Best Wishes, | Joe

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Re: How do you avoid bad market timing for lump sum investments?

Post by Leeraar » Sat Apr 23, 2016 11:24 am

Leeraar wrote:By engaging in good market timing?

L.


Let me try to be a little more helpful. Market timing does not work. It is always "bad".

There are interesting studies that look at the following sort of scenario: What if you had invested over the last 20 years, but only ever purchased at the peak before a 10% or more market decline? It turns out, you would have done fine.

If you really want to get killed, try market timing by trading in AND out of the market.

If you want to be famous, become a perma-bear. Every month, predict the market will soon drop catastrophically. One day you will be correct. Your newsletter will then sell well for a year or two.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

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iceport
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Re: How do you avoid bad market timing for lump sum investments?

Post by iceport » Sat Apr 23, 2016 11:33 am

JMacDonald wrote:
tibbe wrote:It seems to me that if I do just a single large purchase, at an unlucky moment

Well, an unlucky moment was September, 2008, when the last big crash occurred. See this Morningstar chart for the Vanguard Total Stock Market Fund to see how you would have done if you had invested that month.

http://quotes.morningstar.com/chart/fun ... ture=en-US

Presumably, this is intended to ally any fears of unlucky timing?

Well, it might work as long as you don't look back.

If you had invested $10,000 on 9/12/08, you'd have $19,921 by now. Not Bad!

On the other hand, if you had waited one month, and instead invested that same $10,000 on 10/12/08, you'd instead have $27,717 by now. That's almost 40% more.
"Discipline matters more than allocation.” ─William Bernstein

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reriodan
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Re: How do you avoid bad market timing for lump sum investments?

Post by reriodan » Sat Apr 23, 2016 11:35 am

If you are worried about bad market timing, you are not ready to be invested in stocks.

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patrick013
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Re: How do you avoid bad market timing for lump sum investments?

Post by patrick013 » Sat Apr 23, 2016 11:46 am

tibbe wrote:
It seems to me that if I do just a single large purchase, at an unlucky moment, I could end up doing worse than the market.



Most advice is from econometric sources which rely on info 30-40
year old and some times longer. It's good advice.

Historically a crash occurs when the 500 PE sits at 25 for awhile, today
it is 24.
age in bonds, buy-and-hold, 10 year business cycle

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whodidntante
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Re: How do you avoid bad market timing for lump sum investments?

Post by whodidntante » Sat Apr 23, 2016 12:05 pm

When you put in your lump sum, everyone else will sell to get your money. At least that's how it seems sometimes. :oops:

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Re: How do you avoid bad market timing for lump sum investments?

Post by Sbashore » Sat Apr 23, 2016 5:06 pm

I have it written into my IPS. Invest new money as soon as available.
Steve | Semper Fi

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Re: How do you avoid bad market timing for lump sum investments?

Post by malabargold » Sat Apr 23, 2016 6:20 pm

if you don't have a long term perspective, investing in stocks
isn't for you.

If you do invest in equities as the decades roll by you'll have scads more equity at risk.

Imagine losing perhaps 20x what you have today in a sharp Bear
downturn. And Bears will come.

If you are afraid now, you'll be absolutely petrified then.

Be satisfied with CD's.

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Re: How do you avoid bad market timing for lump sum investments?

Post by pkcrafter » Sat Apr 23, 2016 7:57 pm

reriodan wrote:If you are worried about bad market timing, you are not ready to be invested in stocks.

There's a lot said here. But to clarify...


Are you new to investing?

is the money you want to invest new to the market, or is was it invested somewhere else?

What is your intended asset allocation for the money?

Is this money all the investable money you have to invest?

Sorry for all the questions, but a little more information will get you better answers.

Paul

Are you new to investing?

Paul

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.

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Re: How do you avoid bad market timing for lump sum investments?

Post by Dandy » Sun Apr 24, 2016 8:01 am

Since equities usually rise over time lump sum immediately usually wins. My only problem with that is I "feel" that when markets are at or near a high by some object measure not media hype, that it can make some sense to do some lump some now to get in the market and then Dollar Cost Average the rest over a 9-18 month period. I know of no studies that confirm this "feeling".

Here is what I would do in today's market if I was relatively young and somewhat risk averse:

1. Put 25% in now at your target allocation.
2. Set up an automatic monthly DCA to your target allocation for 12 months to get you fully invested.
3. When the equity market (say the S&P 500) has a negative month double the automatic DCA investment that month i.e. if the automatic DCA is 10k then you add another 10k.

The above will get you off the sidelines with an easy plan and be fully invested in a year, and you will probably have an opportunity to invest when the market is down. If so, this will help teach you to invest in a "bad" market but will also get you fully invested earlier.

The equity market could plunge at any time - maybe during your DCA period or just after you are fully invested or 2 years from now. I just think when a market is near a historic high I'd like to tip toe in a bit rather than do a high dive. :happy

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Re: How do you avoid bad market timing for lump sum investments?

Post by lostcowboy » Mon Apr 25, 2016 7:52 pm

Tibbe, my hat's of to you! I can see a lot of people did not read your original statement close enough.
Lets say I decided to start investing and would like to move into index funds with a lump of cash. I'm not trying to beat the market, but I would like to get the long term market returns.

It seems to me that if I do just a single large purchase, at an unlucky moment, I could end up doing worse than the market.


By definition, if you buy the market, you will have the same return as the market.

That being said, in one book I read the author said that if you do a 50%/50% split between stocks and bonds you would have the same risk reduction as dollar cost averaging, but with a greater return than dollar cost averaging. In other words if you have a lump sum don't dollar cost average, but determine your asset allocation, and do it right away. do determine how much risk you can take.

Example somewhere around 1985 my sister's company switched their employee's to 401k's . My sister picked a aggressive fund as she was doing dollar cost averaging into it. Somewhere around 2000 before the crash, I was reading a lot of concern in the forums about the stock market. I got her to let me have the name of her fund, and i looked at the chart and i didn't like the way it looked and tried to get her to move some of the funds into a bond market She said NO, I know what I am doing, I am Dollar Cost Averaging, and I have ten years before I retire. I am sure she thought a aggressive fund meant she might have to worry about a 30% drop, what she got was a 75% drop. I am sure the emotional stress of losing almost 15 years of profit affected her health. A few years later she had a stroke.

So be prepared to risk losing what ever amount you put into the stock market.

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Toons
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Re: How do you avoid bad market timing for lump sum investments?

Post by Toons » Mon Apr 25, 2016 7:57 pm

Impossible.
Anyway ,
Anytime is a good time to invest.
You won't even remember the share price you paid for an index fund,,,
30 years from now. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: How do you avoid bad market timing for lump sum investments?

Post by Leeraar » Mon Apr 25, 2016 8:58 pm

Toons wrote:Impossible.
Anyway ,
Anytime is a good time to invest.
You won't even remember the share price you paid for an index fund,,,
30 years from now. :happy

It's something I always tell my wife:

You'll remember the meal long after you forget the price.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

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Re: How do you avoid bad market timing for lump sum investments?

Post by hollowcave2 » Mon Apr 25, 2016 10:03 pm

To the OP;

This is exactly what DCA is for.

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Re: How do you avoid bad market timing for lump sum investments?

Post by MIpreRetirey » Tue Apr 26, 2016 12:31 am

lostcowboy wrote:Tibbe, my hat's of to you! I can see a lot of people did not read your original statement close enough.
Lets say I decided to start investing and would like to move into index funds with a lump of cash. I'm not trying to beat the market, but I would like to get the long term market returns.

It seems to me that if I do just a single large purchase, at an unlucky moment, I could end up doing worse than the market.


By definition, if you buy the market, you will have the same return as the market.

That being said, in one book I read the author said that if you do a 50%/50% split between stocks and bonds you would have the same risk reduction as dollar cost averaging, but with a greater return than dollar cost averaging. In other words if you have a lump sum don't dollar cost average, but determine your asset allocation, and do it right away. do determine how much risk you can take.


Example somewhere around 1985 my sister's company switched their employee's to 401k's . My sister picked a aggressive fund as she was doing dollar cost averaging into it. Somewhere around 2000 before the crash, I was reading a lot of concern in the forums about the stock market. I got her to let me have the name of her fund, and i looked at the chart and i didn't like the way it looked and tried to get her to move some of the funds into a bond market She said NO, I know what I am doing, I am Dollar Cost Averaging, and I have ten years before I retire. I am sure she thought a aggressive fund meant she might have to worry about a 30% drop, what she got was a 75% drop. I am sure the emotional stress of losing almost 15 years of profit affected her health. A few years later she had a stroke.

So be prepared to risk losing what ever amount you put into the stock market.


I wouldn't mind lumping it all at something like 50/50 stock/bonds, or there about.

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Re: How do you avoid bad market timing for lump sum investments?

Post by JoinToday » Tue Apr 26, 2016 12:56 am

I like the idea of doing a mix of lump sum plus dollar cost average.

Put 33% or 40% or 50% of your equity allocation in now, and dollar cost average the rest of your equity allocation over the next year of two. For the assets you don't put in equity, put them in a bond fund.

Having said that, I usually don't have the patience. I will put 40% now, lose patience, and put the rest in in a month or so. Feels better just to get your money in place, so you don't have to think about it anymore. I am ok with the knowledge that investing entails some risk, and sometimes it goes your way, sometimes it doesn't, so I don't fret (too much at least) when the market drops after I invest. Of course, I might feel different with a 50% drop after lump sum, but that hasn't happened to me yet.
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Re: How do you avoid bad market timing for lump sum investments?

Post by Slothmeister » Mon Oct 02, 2017 3:09 pm

iceport wrote:
Sat Apr 23, 2016 11:33 am
JMacDonald wrote:
tibbe wrote: It seems to me that if I do just a single large purchase, at an unlucky moment
Well, an unlucky moment was September, 2008, when the last big crash occurred. See this Morningstar chart for the Vanguard Total Stock Market Fund to see how you would have done if you had invested that month.

http://quotes.morningstar.com/chart/fun ... ture=en-US
Presumably, this is intended to ally any fears of unlucky timing?

Well, it might work as long as you don't look back.

If you had invested $10,000 on 9/12/08, you'd have $19,921 by now. Not Bad!

On the other hand, if you had waited one month, and instead invested that same $10,000 on 10/12/08, you'd instead have $27,717 by now. That's almost 40% more.
This is my argument on investing a lump sum during an aging bull market.

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Earl Lemongrab
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Re: How do you avoid bad market timing for lump sum investments?

Post by Earl Lemongrab » Mon Oct 02, 2017 3:41 pm

Slothmeister wrote:
Mon Oct 02, 2017 3:09 pm
This is my argument on investing a lump sum during an aging bull market.
What argument is that?
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

hoops777
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Re: How do you avoid bad market timing for lump sum investments?

Post by hoops777 » Mon Oct 02, 2017 3:59 pm

Everyone knows all of the usual responses to this question,but I would say that a reasonable person might not want to invest a large lump sum 100 pct into stocks right now for some very obvious reasons,some which cannot be discussed on this forum.
K.I.S.S........so easy to say so difficult to do.

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Re: How do you avoid bad market timing for lump sum investments?

Post by rbaldini » Mon Oct 02, 2017 4:07 pm

tibbe wrote:
Sat Apr 23, 2016 10:09 am
It seems to me that if I do just a single large purchase, at an unlucky moment, I could end up doing worse than the market.
If you're invested in the market from time A to time B, and you're using a (perfect) index, then you can't "end up doing worse than the market" even if it's right before a big drop. You necessarily get market return.

Presumably what you mean here is that you'll do worse than what the market usually gets, i.e. less than around 9% long term. Certainly your long term return will depend a lot on your first investment period. For example, if you invest just before a 25% drop, you'll end up with 25% money later on than if you had waited until after the dip, regardless of what happens later, regardless of how long you wait. (On that money - not other investments at other times.)

As far as I know, the only way to avoid this sensitivity to initial investment is
(1) Don't put it in as a lump sum. This means less time in the market, so ultimately less risk, less reward. You are now expecting to do (slightly) worse than the market, but at least you avoid investing it all before a big crash. Up to you.
(2) Be able to predict when large price movements happen. Good luck.
Last edited by rbaldini on Mon Oct 02, 2017 4:12 pm, edited 1 time in total.

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Earl Lemongrab
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Re: How do you avoid bad market timing for lump sum investments?

Post by Earl Lemongrab » Mon Oct 02, 2017 4:12 pm

hoops777 wrote:
Mon Oct 02, 2017 3:59 pm
Everyone knows all of the usual responses to this question,but I would say that a reasonable person might not want to invest a large lump sum 100 pct into stocks right now for some very obvious reasons,some which cannot be discussed on this forum.
Then you shouldn't want to keep what you have in the market either. It's symmetric, at least in tax-advantaged. Are you selling all your stocks in IRAs and 401(k)s? If not, why not?
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

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Pajamas
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Re: How do you avoid bad market timing for lump sum investments?

Post by Pajamas » Mon Oct 02, 2017 4:15 pm

Just want to point out that this is a zombie thread. The original poster created this thread in 2016 and has not posted anything since.

Carry on! :beer

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Re: How do you avoid bad market timing for lump sum investments?

Post by VaR » Mon Oct 02, 2017 4:26 pm

The wiki article section on DCA vs Lump Sum is good: https://www.bogleheads.org/wiki/Dollar_ ... s_lump_sum

A lot of previous articles have covered the ground well: https://www.google.com/search?q=site%3A ... s+lump+sum

One of these previous articles covered the actual expected loss and reduced volatility from DCA vs Lump Sum.

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Re: How do you avoid bad market timing for lump sum investments?

Post by hoops777 » Mon Oct 02, 2017 5:28 pm

Earl Lemongrab wrote:
Mon Oct 02, 2017 4:12 pm
hoops777 wrote:
Mon Oct 02, 2017 3:59 pm
Everyone knows all of the usual responses to this question,but I would say that a reasonable person might not want to invest a large lump sum 100 pct into stocks right now for some very obvious reasons,some which cannot be discussed on this forum.
Then you shouldn't want to keep what you have in the market either. It's symmetric, at least in tax-advantaged. Are you selling all your stocks in IRAs and 401(k)s? If not, why not?
That is one way to look at.Believe it or not there are different ways to look at it.We are not all required by law to lump sum into the market without regard to price,circumstance,world events or whatever else is meaningful to you.Me or anyone else not wanting to put new money into the market does not mean that person should also sell all their stocks in tax deferred accounts.That is a little bit extreme.When I said a reasonable person I did not mean to imply someone was unreasonable if they did want to lump sum it all,but that a person who may normally lump sum everything,might back off today.....or might not.
K.I.S.S........so easy to say so difficult to do.

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Earl Lemongrab
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Re: How do you avoid bad market timing for lump sum investments?

Post by Earl Lemongrab » Mon Oct 02, 2017 5:37 pm

hoops777 wrote:
Mon Oct 02, 2017 5:28 pm
That is one way to look at.Believe it or not there are different ways to look at it.
Then explain the difference. I don't think you can, because it's really a form of cognitive bias called anchoring. You are treating money already invested as somehow different than cash not invested. But, absent taxes, they aren't different. If you somehow think that you can time the market (and don't kid yourself that it isn't what you're doing) then you should be able to apply that timing to all your funds not just a lump of new cash.
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

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Re: How do you avoid bad market timing for lump sum investments?

Post by hoops777 » Mon Oct 02, 2017 6:15 pm

I apologize sincerely for looking at a very long aging bull market with stocks at all time highs,chaos in DC that cannot be talked about,huge international problems,natural disasters and other things,and saying that if I had somehow acquired a large amount of money,I may not want to lump sum it all into this current market.What you call anchoring someone else calls common sense.
I respectfully say to you that there is a difference between someone who constantly times the market and the scenario presented here on this thread.Some people had some reasonable suggestions,including quoting some guy name Bill Bernstein who is thought of very highly in Bogleheads Land.
I guess we can be anchored in different ways.
K.I.S.S........so easy to say so difficult to do.

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Earl Lemongrab
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Re: How do you avoid bad market timing for lump sum investments?

Post by Earl Lemongrab » Mon Oct 02, 2017 7:00 pm

Again, there's no difference between having money in stocks and selling them to cash and having cash and not buying stocks per your allocation. Or the reverse. Anything else is anchoring because you are mentally separating the two situations. I have over one million in stocks right now. Tomorrow they could be in cash if I wanted. How big of a lump do you want? Even if you want to avoid taxes, I have over 380k in stocks in tax-advantaged, that again could be in cash tomorrow. So should I sell to avoid the political and weather situation? If not, why not?

Now, if one suddenly came into a large amount of cash, reevaluating your target allocation might make sense, just as I twice reevaluated my allocation over the past ten years based on milestones achieved in assets and age. However, that would be irrespective of what's "going on" in the world. Remember, everyone else knows what's going on, not just you.

You are once again thinking that you can time the market. The difference is that I don't think I can. I do not try to strategically manipulate my portfolio due to current events. I don't have special powers, nor do you. Remember that a lot people thought the market would crash after the election. Well, they was wrong, wrongety wrong. If they avoided putting a lump sum in then, they missed out.
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

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Re: How do you avoid bad market timing for lump sum investments?

Post by hoops777 » Mon Oct 02, 2017 7:38 pm

A lot of people knew what I knew in 2008 as well and lumped sum and were wrong,wrong,wrong. :D Is Bernstein anchoring?You are right about the special powers,but we do both have the right to evaluate what we see and form opinions that may be polar opposite but reasonable.Lets just leave it at that.Please think about the difference between a serial market timer and what this thread was about.Big difference.
K.I.S.S........so easy to say so difficult to do.

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Earl Lemongrab
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Re: How do you avoid bad market timing for lump sum investments?

Post by Earl Lemongrab » Mon Oct 02, 2017 7:50 pm

hoops777 wrote:
Mon Oct 02, 2017 7:38 pm
A lot of people knew what I knew in 2008 as well and lumped sum and were wrong,wrong,wrong. :D Is Bernstein anchoring?You are right about the special powers,but we do both have the right to evaluate what we see and form opinions that may be polar opposite but reasonable.Lets just leave it at that.Please think about the difference between a serial market timer and what this thread was about.Big difference.
All that proves is that no one knows. Yep, bad things happened in 2008-2009. I should know, because I started my current portfolio in the summer of 2007, including a big lump sum of cash in taxable. I rode it out, I rebalanced, I did TLH (with all the new investment in taxable, plenty of that) and here we are.

There is no difference in types of market timing. You want to think that you can somehow read the tea leaves. You can't other than luck. If you want to go on thinking that, be my guest. I'm done.
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

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Re: How do you avoid bad market timing for lump sum investments?

Post by hoops777 » Mon Oct 02, 2017 10:18 pm

You never answered my question about Bernstein.
I am happy for you that you have done well with your investments,but maybe you might try being a little less dogmatic.You are a smart guy and you have to know there is a difference between thinking that you can always time and outsmart the market vs.getting a windfall in the current market, and having an opinion it might be better to dca or do what Bernstein suggests.If you cannot see that then maybe the anchor belongs to you.I wish you continued success and markets that go continuously up. :beer
I am done as well.
K.I.S.S........so easy to say so difficult to do.

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Earl Lemongrab
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Re: How do you avoid bad market timing for lump sum investments?

Post by Earl Lemongrab » Mon Oct 02, 2017 11:27 pm

hoops777 wrote:
Mon Oct 02, 2017 10:18 pm
You never answered my question about Bernstein.
Because I didn't know what you meant.
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

VaR
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Re: How do you avoid bad market timing for lump sum investments?

Post by VaR » Tue Oct 03, 2017 1:12 am

Hoops and Earl, you seem to be having a side conversation with just each other. Do either of you have any disagreement with what's posted on the wiki? The recommendation there is to either:
1. invest in a lump sum today
2. dollar cost average in over 6 months
3. invest 50% today and to DCA in the other half over the next 6 months

I think all three of these are reasonable choices, given the lump sum recipient's risk tolerance. Between them we can have a discussion but I think it's valuable to set the boundaries of bogleheadness.

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Re: How do you avoid bad market timing for lump sum investments?

Post by hoops777 » Tue Oct 03, 2017 11:20 am

VaR wrote:
Tue Oct 03, 2017 1:12 am
Hoops and Earl, you seem to be having a side conversation with just each other. Do either of you have any disagreement with what's posted on the wiki? The recommendation there is to either:
1. invest in a lump sum today
2. dollar cost average in over 6 months
3. invest 50% today and to DCA in the other half over the next 6 months

I think all three of these are reasonable choices, given the lump sum recipient's risk tolerance. Between them we can have a discussion but I think it's valuable to set the boundaries of bogleheadness.
Well my point was that ,it is REASONABLE to not want to lump sum a windfall into to any market,with my emphasis on the current market.The wiki obviously backs that up.That was it.To be honest,I personally would not follow the wiki advice in today's market,but I find it reasonable if anyone wishes to follow it.
Anyway,no point continuing this any further.
K.I.S.S........so easy to say so difficult to do.

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Re: How do you avoid bad market timing for lump sum investments?

Post by hoops777 » Tue Oct 03, 2017 11:23 am

Earl Lemongrab wrote:
Mon Oct 02, 2017 11:27 pm
hoops777 wrote:
Mon Oct 02, 2017 10:18 pm
You never answered my question about Bernstein.
Because I didn't know what you meant.
I assumed you understood that he does not agree with you.There were earlier posts about it.
K.I.S.S........so easy to say so difficult to do.

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Re: How do you avoid bad market timing for lump sum investments?

Post by Earl Lemongrab » Tue Oct 03, 2017 11:37 am

hoops777 wrote:
Tue Oct 03, 2017 11:20 am
Well my point was that ,it is REASONABLE to not want to lump sum a windfall into to any market
The funny thing is that you still don't see that money already invested is equivalent to investing a lump sum. Under your theory, you should keep selling everything so that you can DCA it back in. What that really amounts to is having a more conservative allocation, which is the real answer. If the lump sums make you too nervous, then you probably have the wrong asset allocation. That's the way to fix it. That's why I don't worry too much about my big lump in stocks, because I also have 40% in fixed-income investments.
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

Tamalak
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Re: How do you avoid bad market timing for lump sum investments?

Post by Tamalak » Tue Oct 03, 2017 1:09 pm

If you've been invested for 20 years and the market drops 10%, you lose 10%.

If you invested yesterday and the market drops 10%, you lose 10%.

The first scenario doesn't FEEL as bad, but it IS as bad.

You buy your portfolio every day.

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Re: How do you avoid bad market timing for lump sum investments?

Post by hoops777 » Tue Oct 03, 2017 1:27 pm

Earl Lemongrab wrote:
Tue Oct 03, 2017 11:37 am
hoops777 wrote:
Tue Oct 03, 2017 11:20 am
Well my point was that ,it is REASONABLE to not want to lump sum a windfall into to any market
The funny thing is that you still don't see that money already invested is equivalent to investing a lump sum. Under your theory, you should keep selling everything so that you can DCA it back in. What that really amounts to is having a more conservative allocation, which is the real answer. If the lump sums make you too nervous, then you probably have the wrong asset allocation. That's the way to fix it. That's why I don't worry too much about my big lump in stocks, because I also have 40% in fixed-income investments.

See now you are getting somewhere!YOU do not worry about a lump sum because YOU have 40 pct in fixed income.YOU have a large portfolio.Do you not consider that someone else has a financial situation that is drastically different from yours?Maybe someone just retired and has a very small portfolio and this windfall of say 100,000 is greatly needed for current spending.Should they just dump 100,000 into the stock market right now?No worries right?Are they trying to outsmart the market or maybe just being prudent?
You cannot just take something so complex and simplify it into a hard fast rule for everyone.Remember we are talking investing it 100 pct into stocks,not buying a balanced fund like Wellesley or a similar index based fund.I think you may have misunderstood that we were speaking about putting it only into stocks.
K.I.S.S........so easy to say so difficult to do.

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Re: How do you avoid bad market timing for lump sum investments?

Post by Earl Lemongrab » Tue Oct 03, 2017 1:31 pm

hoops777 wrote:
Tue Oct 03, 2017 1:27 pm

See now you are getting somewhere!YOU do not worry about a lump sum because YOU have 40 pct in fixed income.YOU have a large portfolio.Do you not consider that someone else has a financial situation that is drastically different from yours?Maybe someone just retired and has a very small portfolio and this windfall of say 100,000 is greatly needed for current spending.Should they just dump 100,000 into the stock market right now?No worries right?Are they trying to outsmart the market or maybe just being prudent?
You continue to miss the point. Everyone should have an allocation that keeps them from trying to go with the futile effort that is market timing. Also that there is little difference (and none in tax-advantaged) between holding and not buying.
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

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Re: How do you avoid bad market timing for lump sum investments?

Post by hoops777 » Tue Oct 03, 2017 2:55 pm

Earl Lemongrab wrote:
Tue Oct 03, 2017 1:31 pm
hoops777 wrote:
Tue Oct 03, 2017 1:27 pm

See now you are getting somewhere!YOU do not worry about a lump sum because YOU have 40 pct in fixed income.YOU have a large portfolio.Do you not consider that someone else has a financial situation that is drastically different from yours?Maybe someone just retired and has a very small portfolio and this windfall of say 100,000 is greatly needed for current spending.Should they just dump 100,000 into the stock market right now?No worries right?Are they trying to outsmart the market or maybe just being prudent?
You continue to miss the point. Everyone should have an allocation that keeps them from trying to go with the futile effort that is market timing. Also that there is little difference (and none in tax-advantaged) between holding and not buying.
I will tell you what the difference is.
Say I have 1 million in the total market.
I inherit 200,000.
Because I do not want to lump sum the 200,000 into the current market,you say I should sell the million and dca that as well.
So in your words there is no difference between market timing 200,000 vs 1,200,000?
Are you sure you want to go with that because that is what you said a couple times in your responses.On one hand I am trying to "outsmart " the market with only 200,000.Adding another million does not completely change my long term results?
K.I.S.S........so easy to say so difficult to do.

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Re: How do you avoid bad market timing for lump sum investments?

Post by Earl Lemongrab » Tue Oct 03, 2017 3:22 pm

hoops777 wrote:
Tue Oct 03, 2017 2:55 pm
I will tell you what the difference is.
Say I have 1 million in the total market.
I inherit 200,000.
Because I do not want to lump sum the 200,000 into the current market,you say I should sell the million and dca that as well.
So in your words there is no difference between market timing 200,000 vs 1,200,000?
Are you sure you want to go with that because that is what you said a couple times in your responses.On one hand I am trying to "outsmart " the market with only 200,000.Adding another million does not completely change my long term results?
Then why didn't you sell 200k before? Or 100k? What's special about this lump in cash that you just got? You fundamentally don't seem to realize that, as said above, you're buying your portfolio every day. Every day you lump sum that million into the market. What's different about the new 200k that didn't apply to the million on the day before?

I started my new portfolio in 2007, just about hitting the market peak before things fell apart. I had $677,000 to start. About 1/3 of that was new cash in bank accounts that was invested in stock ETFs. I didn't DCA. Sure, I'd have liked to have foreknowledge of what was to come. Had I, it would have all been in bonds.

Some people claim the signs were there, and of course there were people shouting "crash is a comin!" But there always are. A guiding principle of my investment strategy is that I don't think anyone can time the market, but I'm certain that I can't. So I ignore the noise, I ignore the politics, I ignore the weather.
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

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Re: How do you avoid bad market timing for lump sum investments?

Post by longinvest » Tue Oct 03, 2017 4:02 pm

Dollar cost averaging (DCA) is a boiling frog approach. I disagree with it.

If one is unwilling to accept the risk of his portfolio's target asset allocation by dumping everything into it, it would be illogical (and quite dangerous from a behavioral point of view) to do it over a longer time frame.

Every time we hold a portfolio, without selling part of it or adding to it, is equivalent to selling the entire portfolio and buying it right back for the same price (and no transaction fees or taxes). In other words, by doing nothing, we are effectively deciding to reinvest it into its current effective* asset allocation.

* As opposed to its current target asset allocation. In other words, not rebalancing a portfolio which has significantly drifted away from its target allocation is equivalent to reinvesting the portfolio according to a new target asset allocation.

Using DCA instead of adding a lump sum to a portfolio is effectively equivalent to changing the asset allocation only to ease back slowly into it**, like a boiling frog. While it might feel better, it offers no protection whatsoever against stocks crashing just at the end of the DCA period. If one is unwilling to accept the full risk of his target asset allocation, the solution is to change the target asset allocation to something bearable and immediately invest accordingly.

** For example, using DCA to add $120,000 using twelve $10,000 monthly transactions into a $80,000 100% stocks portfolio is equivalent to changing the portfolio's asset allocation to 45/55 stocks/cash ($90,000 stocks/$110,000 cash) in the first month, 50/50 in the second month, 55/45 in the third month, and so on until going back to 100% stocks in the last month.

Lump sums are actually an awesome tool to help better assess our difficult-to-discover willingness to accept risk. It's easy to blindly accept more risk than we realize when investing in small increments. We tend to only concentrate our attention on each small contribution; as a result, the risk seems small. We think: "What if I lost 50% of this $500 I'm investing? I would temporarily lose $250. I make many times that each months! Anyway, I would get the opportunity to buy stocks at a 50% rebate with my next contribution. OK. Let's go with it!". We forget that we are, in fact, deciding to (re)invest the entire portfolio into the effective asset allocation.

The danger from a behavioral point of view (mentioned in my second paragraph) is to discover our unwillingness to accept as much risk after the fact, after stocks have crashed and we've lost more than we were willing to lose. Lots of people discovered their effective willingness to accept risk in 2008-2009 and reacted in a self-destructive manner. Some got out of stocks entirely. Others, with some allocation to bonds, simply stopped rebalancing their portfolio; they were willing to buy stocks at high prices a few months earlier, but unwilling to buy more at a 50% rebate! I don't need to remind anyone that "buy high, sell low" is not a good investing recipe.

Beyond our hard-to-discover subjective willingness to accept risk, there's also our objective capacity to assume the consequences of a bad outcome. In 2008-2009, what caused some workers to sell part of their stock holdings at a rebate was that they lost their job and needed the money to pay their mortgage and other expenses. They didn't sell because they were afraid of stocks, but because they had no alternative.

In summary: I think that resorting to DCA is indicative of a dangerous behavioral pitfall.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: How do you avoid bad market timing for lump sum investments?

Post by hoops777 » Tue Oct 03, 2017 5:48 pm

Earl Lemongrab wrote:
Tue Oct 03, 2017 3:22 pm
hoops777 wrote:
Tue Oct 03, 2017 2:55 pm
I will tell you what the difference is.
Say I have 1 million in the total market.
I inherit 200,000.
Because I do not want to lump sum the 200,000 into the current market,you say I should sell the million and dca that as well.
So in your words there is no difference between market timing 200,000 vs 1,200,000?
Are you sure you want to go with that because that is what you said a couple times in your responses.On one hand I am trying to "outsmart " the market with only 200,000.Adding another million does not completely change my long term results?
Then why didn't you sell 200k before? Or 100k? What's special about this lump in cash that you just got? You fundamentally don't seem to realize that, as said above, you're buying your portfolio every day. Every day you lump sum that million into the market. What's different about the new 200k that didn't apply to the million on the day before?

I started my new portfolio in 2007, just about hitting the market peak before things fell apart. I had $677,000 to start. About 1/3 of that was new cash in bank accounts that was invested in stock ETFs. I didn't DCA. Sure, I'd have liked to have foreknowledge of what was to come. Had I, it would have all been in bonds.

Some people claim the signs were there, and of course there were people shouting "crash is a comin!" But there always are. A guiding principle of my investment strategy is that I don't think anyone can time the market, but I'm certain that I can't. So I ignore the noise, I ignore the politics, I ignore the weather.
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