Likelihood of a crash and lump sum investing

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jhehl
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Likelihood of a crash and lump sum investing

Post by jhehl » Thu Sep 28, 2017 3:26 pm

I've only recently started to learn more about investing and economics, so apologies in advance.

I've read on here and on other sites that if one would have a larger sum to invest, on average there wouldn't be a financial advantage of doing dollar cost averaging vs lump lump sum. The point that stands out to me though is the average part. Aren't there times where probability of a crash is way higher based on what's going on... or are the odds pretty much always 50/50?

If you would have all your net worth it cash right now, you would invest it lump sum right now?

KlangFool
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Re: Likelihood of a crash and lump sum investing

Post by KlangFool » Thu Sep 28, 2017 3:28 pm

OP,

Unless you are 100% stock, the answer would be yes.

KlangFool

jhehl
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Re: Likelihood of a crash and lump sum investing

Post by jhehl » Thu Sep 28, 2017 3:40 pm

Not 100% stocks, but either the standard 100 - age in stocks or the percentage the Vanguard Target Date Funds uses (~90% stocks for me, planning to retire in 2045)

avalpert
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Re: Likelihood of a crash and lump sum investing

Post by avalpert » Thu Sep 28, 2017 4:08 pm

jhehl wrote:
Thu Sep 28, 2017 3:26 pm
Aren't there times where probability of a crash is way higher based on what's going on...
Possibly, but if you aren't confident enough in you ability to identify those times to change your existing asset allocation then you probably shouldn't let you influence how you deploy new money either.

KlangFool
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Re: Likelihood of a crash and lump sum investing

Post by KlangFool » Thu Sep 28, 2017 4:10 pm

OP,

If you are smart enough to know when will a crash happen and how long it will last, you would be rich and be running a hedge fund now. Since you and I know absolutely nothing, we should just invest according to our asset allocation.

KlangFool

goblue100
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Re: Likelihood of a crash and lump sum investing

Post by goblue100 » Thu Sep 28, 2017 4:15 pm

jhehl wrote:
Thu Sep 28, 2017 3:26 pm
or are the odds pretty much always 50/50?
The odds are not 50/50:
"Consider some of the facts from the last 90 years,
•Markets have gone up 73.9% of the time
•Markets have gone down 26.1% of the time
•The market gained more than 20% in 33% of the time
•The market lost more than 20% in 4.5% of the time
•The gains in positive years produce more than double the losses in the negative years"
https://retirehappy.ca/realities-of-stock-markets/
jhehl wrote:
Thu Sep 28, 2017 3:26 pm
If you would have all your net worth it cash right now, you would invest it lump sum right now?
Despite what I posted above, I probably wouldn't lump sum a large sum. I would do it over about 6 months. That is just what would let me sleep better.
Some people are immune to good advice. - Saul Goodman

livesoft
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Re: Likelihood of a crash and lump sum investing

Post by livesoft » Thu Sep 28, 2017 4:18 pm

jhehl wrote:
Thu Sep 28, 2017 3:26 pm
I've read on here and on other sites that if one would have a larger sum to invest, on average there wouldn't be a financial advantage of doing dollar cost averaging vs lump lump sum.
Did you also read that there wouldn't be much of a financial advantage of doing lump lump sum versus dollar cost averaging?

That's the amazing thing, one way or the other hardly makes enough difference to bother discussing it.

The actual difference over 1 year is in the fine print.
This signature message sponsored by sscritic: Learn to fish.

KlangFool
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Re: Likelihood of a crash and lump sum investing

Post by KlangFool » Thu Sep 28, 2017 4:19 pm

OP,

I would lump sum at either 70/30 or 60/40. 90/10 is a lousy AA in terms of risk-adjusted return.

KlangFool

jhehl
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Re: Likelihood of a crash and lump sum investing

Post by jhehl » Thu Sep 28, 2017 4:23 pm

avalpert wrote:
Thu Sep 28, 2017 4:08 pm
Possibly, but if you aren't confident enough in you ability to identify those times to change your existing asset allocation then you probably shouldn't let you influence how you deploy new money either.
So basically, just to see if I understand it correctly: if the signs of a crash would be obvious enough that the people here would know about, the crash would already be happening, because everybody would react to those signs?

Everybody else is either a genius, has inside information or just making speculations that might come true or not?

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Meg77
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Re: Likelihood of a crash and lump sum investing

Post by Meg77 » Thu Sep 28, 2017 4:26 pm

The odds are not 50/50. There are various studies that compare lump sum investing to dollar cost averaging, but they evaluate different historical periods (the last 20 years versus the last 50 years, for example) and different investment time periods (dollar cost averaging over 6 months versus 2 years for example) so the results can vary. My recollection based on most of what I've read is that lump sum investing comes out ahead of dollar cost averaging 70-80% of the time. That's very basically because stocks go up in 70-80% of all years.

Remember though that even if you happen to invest into 100% stocks right before a 20% correction, you haven't necessarily lost money compared to dollar cost averaging. It depends what happens over the next 12 months. The market may bounce back up over the next 3 months and then soar to new heights taking your entire portfolio with it. You'll get dividends all year versus only 1/12 of the dividends in each month as you invest more slowly.

If this lump sum represents more than 30% of your net worth, or if it's all you have (i.e. you aren't saving more each month), or if it's an emotional pot of money such as an inheritance or insurance settlement, then I would DCA it over 12 months instead of lump sum investing. Just for psychological reasons. Personal finance is PERSONAL after all. But if this is a small piece of your "world" and you're still in the accumulation phase, just dump it in. Odds are you'll come out ahead, or be very close anyway.
"An investment in knowledge pays the best interest." - Benjamin Franklin

jhehl
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Re: Likelihood of a crash and lump sum investing

Post by jhehl » Thu Sep 28, 2017 4:29 pm

KlangFool wrote:
Thu Sep 28, 2017 4:19 pm
I would lump sum at either 70/30 or 60/40. 90/10 is a lousy AA in terms of risk-adjusted return.
Not 90/10 because of the lump sum investment or generally? Would you increase to 90/10 later on though? Like I said 90/10 is what the Vanguard Target Date Funds use.

deltaneutral83
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Re: Likelihood of a crash and lump sum investing

Post by deltaneutral83 » Thu Sep 28, 2017 4:30 pm

Not lump summing has been pretty bad the last 6 years. Unless of course you began a 12 month DCA in July 2015 and DCA'd through July 2016. Did you properly identify this 12 month period in advance?

Levett
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Re: Likelihood of a crash and lump sum investing

Post by Levett » Thu Sep 28, 2017 4:32 pm

The OP wrote:

"I've only recently started to learn more about investing and economics."

Respectfully, hold off and learn more until you have some idea why you wish to invest and for how long.

It's your money, and you have to own your own decisions.

Lev

bargainhuntingking
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Re: Likelihood of a crash and lump sum investing

Post by bargainhuntingking » Thu Sep 28, 2017 4:34 pm

I think if you thoughtfully pick an AA, you should be comfortable using it to lump sum in both bear and bull markets.

Then have a reasonable rebalancing strategy written in your IPS.

jhehl
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Re: Likelihood of a crash and lump sum investing

Post by jhehl » Thu Sep 28, 2017 4:42 pm

Levett wrote:
Thu Sep 28, 2017 4:32 pm
Respectfully, hold off and learn more until you have some idea why you wish to invest and for how long.

It's your money, and you have to own your own decisions.
I do know why I want to invest and for how long :) When I said "recently" I meant the past 6 - 12 months. Read the a lot here, the bogleheads book and some others. Obviously I wouldn't make a decision solely on the advice give here. But still making sure that I understand some things correctly and still fighting some instincts, even I rationally know that they are most likely stupid.

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Earl Lemongrab
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Re: Likelihood of a crash and lump sum investing

Post by Earl Lemongrab » Thu Sep 28, 2017 4:49 pm

As has been mentioned before, absent taxes there's no difference between not investing and selling. So if the "signs" are such that you're unwilling to lump sum invest new cash, you shouldn't keep already invested money in play. You should sell (at least what's in tax-advantaged accounts) and DCA it back in.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

KlangFool
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Re: Likelihood of a crash and lump sum investing

Post by KlangFool » Thu Sep 28, 2017 4:53 pm

jhehl wrote:
Thu Sep 28, 2017 4:29 pm
KlangFool wrote:
Thu Sep 28, 2017 4:19 pm
I would lump sum at either 70/30 or 60/40. 90/10 is a lousy AA in terms of risk-adjusted return.
Not 90/10 because of the lump sum investment or generally? Would you increase to 90/10 later on though? Like I said 90/10 is what the Vanguard Target Date Funds use.
jhehl,

In general 90/10 is a lousy AA.

KlangFool

DomDangelina
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Re: Likelihood of a crash and lump sum investing

Post by DomDangelina » Thu Sep 28, 2017 5:24 pm

deltaneutral83 wrote:
Thu Sep 28, 2017 4:30 pm
Not lump summing has been pretty bad the last 6 years.

Indeed. I lump summed half a million on November 9, 2016. It's working out beautifully.
"Often the remedy causes the disease. It is by no means the least of life's rules: to let things alone." | Baltasar Gracián, S.J., The Art of Worldly Wisdom, Maxim 121

avalpert
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Re: Likelihood of a crash and lump sum investing

Post by avalpert » Thu Sep 28, 2017 5:45 pm

jhehl wrote:
Thu Sep 28, 2017 4:23 pm
avalpert wrote:
Thu Sep 28, 2017 4:08 pm
Possibly, but if you aren't confident enough in you ability to identify those times to change your existing asset allocation then you probably shouldn't let you influence how you deploy new money either.
So basically, just to see if I understand it correctly: if the signs of a crash would be obvious enough that the people here would know about, the crash would already be happening, because everybody would react to those signs?
Actually, it becomes a self-fulling feedback loop at that point where people panic sell because the other people were panic selling.

But I'm not even going that far - what I am trying to get at here is that there is no difference between 'new money' and 'old money' in your portfolio - if the current market conditions aren't causing you to adjust your allocation of old money it shouldn't cause you to treat new money differently (which is essentially what you do when you DCA, you decrease your stock allocation over the period you DCA).

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blueblock
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Re: Likelihood of a crash and lump sum investing

Post by blueblock » Thu Sep 28, 2017 7:13 pm

jhehl wrote:
Thu Sep 28, 2017 3:40 pm
Not 100% stocks, but either the standard 100 - age in stocks or the percentage the Vanguard Target Date Funds uses (~90% stocks for me, planning to retire in 2045)
Given your planned retirement date, what do you care about a crash? You are in it for the long haul, yes?

I never tire of recommending the Economist Intelligence Unit's Global Forecasting Service, which gives a free overview, updated monthly. It's a great way to tune out the noise.

http://gfs.eiu.com

snarlyjack
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Re: Likelihood of a crash and lump sum investing

Post by snarlyjack » Thu Sep 28, 2017 7:29 pm

If I inherited money today...I would invest it.
I would rather be in the market than out of the market.

I dca every dime I have...

MotoTrojan
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Re: Likelihood of a crash and lump sum investing

Post by MotoTrojan » Thu Sep 28, 2017 9:01 pm

KlangFool wrote:
Thu Sep 28, 2017 4:53 pm

jhehl,

In general 90/10 is a lousy AA.

KlangFool
Hmm... my 100/0 with a 35-40 year horizon is lousy? News to me.

Grt2bOutdoors
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Re: Likelihood of a crash and lump sum investing

Post by Grt2bOutdoors » Thu Sep 28, 2017 9:35 pm

jhehl wrote:
Thu Sep 28, 2017 3:26 pm
I've only recently started to learn more about investing and economics, so apologies in advance.

If you would have all your net worth it cash right now, you would invest it lump sum right now?
One should invest based on need, ability and willingness to take risk. - Recommend reading some of Larry Swedroe's books. You will be enlightened. What I do or believe does not matter. What matters is your ability to SWAN after deciding upon your asset allocation. SWAN = Sleep Well at Night. So, OP, can you sleep well at night if you plunked 100% of your net worth into an investment tomorrow morning at the opening bell - 9:30am EST? If you can't, then a 100% equity portfolio is not for you and there is absolutely nothing wrong with it. You can realize higher risk adjusted returns over time by investing prudently. Reckless investing or really speculative investing is an easy way to lose your hard earned money to the experienced hands. Read some of the recommended books on the wiki book list - especially the ones that focus on asset allocation and behavorial finance.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

The Wizard
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Re: Likelihood of a crash and lump sum investing

Post by The Wizard » Thu Sep 28, 2017 9:46 pm

When the topic of lump summing into the market comes up, at least SOME folks are talking about putting it all into stock funds.
It's hard to sure about that, but a lot of OPs do omit their target AA.

If $100k fell into my lap tomorrow, would I put it all into VTSAX?
I don't think so.
No more than 60% would go to stocks, the remainder going to bonds and similar...
Attempted new signature...

DomDangelina
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Re: Likelihood of a crash and lump sum investing

Post by DomDangelina » Thu Sep 28, 2017 10:28 pm

The Wizard wrote:
Thu Sep 28, 2017 9:46 pm


If $100k fell into my lap tomorrow, would I put it all into VTSAX?
I don't think so.
No more than 60% would go to stocks, the remainder going to bonds and similar...
Would it go into those stocks tomorrow? Or would you wait until prices come down?
"Often the remedy causes the disease. It is by no means the least of life's rules: to let things alone." | Baltasar Gracián, S.J., The Art of Worldly Wisdom, Maxim 121

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badbreath
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Re: Likelihood of a crash and lump sum investing

Post by badbreath » Thu Sep 28, 2017 10:36 pm

I am going to lump sum invest $157000 from a real estate deal I just closed on. It will just go into my AA and I will forget about it.
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

DomDangelina
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Re: Likelihood of a crash and lump sum investing

Post by DomDangelina » Fri Sep 29, 2017 2:02 pm

badbreath wrote:
Thu Sep 28, 2017 10:36 pm
I am going to lump sum invest $157000 from a real estate deal I just closed on. It will just go into my AA and I will forget about it.
What exactly will you be buying?
"Often the remedy causes the disease. It is by no means the least of life's rules: to let things alone." | Baltasar Gracián, S.J., The Art of Worldly Wisdom, Maxim 121

John Laurens
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Re: Likelihood of a crash and lump sum investing

Post by John Laurens » Fri Sep 29, 2017 2:06 pm

I am lump summing every minute of every trading day. With a few mouse clicks I could be 100% cash. Instead I choose to have my “lump sum” invested in my AA as stated by my IPS.

Regards,
John

thangngo
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Re: Likelihood of a crash and lump sum investing

Post by thangngo » Fri Sep 29, 2017 2:11 pm

jhehl wrote:
Thu Sep 28, 2017 3:26 pm
I've only recently started to learn more about investing and economics, so apologies in advance.

I've read on here and on other sites that if one would have a larger sum to invest, on average there wouldn't be a financial advantage of doing dollar cost averaging vs lump lump sum. The point that stands out to me though is the average part. Aren't there times where probability of a crash is way higher based on what's going on... or are the odds pretty much always 50/50?

If you would have all your net worth it cash right now, you would invest it lump sum right now?
It's okay to fear that you'll lose money.

If your fear is greater than your desire to make money, you better off walking away.

If you can handle the risk of losing money, you will enjoy the fruit of your investment in the future.

The odds of a market crash is 0 to 100% on any given trading day. I know that much. Don't need to worry about it. Invest 100% and then move on to make more money to invest.

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Re: Likelihood of a crash and lump sum investing

Post by garlandwhizzer » Fri Sep 29, 2017 3:01 pm

Lump sum gets a bad wrap on this forum. There are academic studies that conclude lump sum is the way to go. The problem with the academic studies is that they're not looking at the current specific market characteristics (valuations, expectations about future corporate profile growth, interest rates, inflation, stage of economic cycle, Fed policy, etc.,). Like all backtesting IMO it definitely tells you what happened in the past on average over a given time frame, but not what is going to happen starting from the specific place we are now with our current economic parameters. I believe there are times when the market's equity pricing gets stretched into high valuations relative to potential risk, or excessive investor optimism or complacency, etc.. In such situations, if you desire to increase your equity exposure relative to bonds, it may best to put the intended equity investment money into a safe repository like MM funds, bank accounts and move equal amounts each month into stocks over a predetermined time frame such as a year. Warren Buffett does it this way when stocks are richly valued relative to his expectations but bonds aren't attractive either.

Academics must crank out research papers trying to make investing a hard science, knowing all to well that they must publish or perish. IMO their conclusions illuminate exactly how things have happened on average over a past time frame, but shed a lot less light on what will happen in the future starting from the exact place where we are now in terms of market parameters. Warren Buffet is no fool and he pays no attention whatsoever to their "proof" that lump sum investing is the only way to go. He picks his times, lump sums in big time at the depths of collapse in 2008-9 for example. It is likely, given current US market parameters, that IMO he would choose to dollar cost average now if intending to invest a huge amount. I think he believes that there are times when it's best to wade into the water slowly and other times to jump in head first. Historically he's been pretty good at picking those times, assessing the current markets long term risk/reward balance better than the market itself. If you're confident you're pretty good at that, it may well work. If you aren't, lump sum is the default position which requires no judgement.

Garland Whizzer

avalpert
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Re: Likelihood of a crash and lump sum investing

Post by avalpert » Fri Sep 29, 2017 4:13 pm

garlandwhizzer wrote:
Fri Sep 29, 2017 3:01 pm
Lump sum gets a bad wrap on this forum. There are academic studies that conclude lump sum is the way to go. The problem with the academic studies is that they're not looking at the current specific market characteristics (valuations, expectations about future corporate profile growth, interest rates, inflation, stage of economic cycle, Fed policy, etc.,). Like all backtesting IMO it definitely tells you what happened in the past on average over a given time frame, but not what is going to happen starting from the specific place we are now with our current economic parameters. I believe there are times when the market's equity pricing gets stretched into high valuations relative to potential risk, or excessive investor optimism or complacency, etc.. In such situations, if you desire to increase your equity exposure relative to bonds, it may best to put the intended equity investment money into a safe repository like MM funds, bank accounts and move equal amounts each month into stocks over a predetermined time frame such as a year. Warren Buffett does it this way when stocks are richly valued relative to his expectations but bonds aren't attractive either.

Academics must crank out research papers trying to make investing a hard science, knowing all to well that they must publish or perish. IMO their conclusions illuminate exactly how things have happened on average over a past time frame, but shed a lot less light on what will happen in the future starting from the exact place where we are now in terms of market parameters. Warren Buffet is no fool and he pays no attention whatsoever to their "proof" that lump sum investing is the only way to go. He picks his times, lump sums in big time at the depths of collapse in 2008-9 for example. It is likely, given current US market parameters, that IMO he would choose to dollar cost average now if intending to invest a huge amount. I think he believes that there are times when it's best to wade into the water slowly and other times to jump in head first. Historically he's been pretty good at picking those times, assessing the current markets long term risk/reward balance better than the market itself. If you're confident you're pretty good at that, it may well work. If you aren't, lump sum is the default position which requires no judgement.

Garland Whizzer
This is all well and good but then we aren't comparing 'lump sum' and 'dollar cost averaging' (which both rely on 'naive' view of near-term market movements and are not trying to predict them).

There are plenty of academic studies that look at that question of whether and to what degree specific market characteristics can provide usable predictive information for traders to guide tactical asset allocation - I'm not sure why you think there aren't. That those studies don't differentiate between the impact on 'new' and 'current' money - and thus don't frame it around 'lump sum investing' - is simply because there shouldn't be any difference.

jhehl
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Re: Likelihood of a crash and lump sum investing

Post by jhehl » Mon Oct 02, 2017 3:25 pm

Thanks for all the great info! Really helpful.

A lot of you mentioned that I just have to do what allows me to sleep at night, which completely makes sense. If I do understand how things work and feel like I've made the right decision up front, I think I will sleep just fine.

So in the end, I probably just have to read and learn more about all of this. The tricky thing for me is just that I feel like there are a lot of unknown unknowns or things where I'm not 100% sure whether I've understood them correctly. But I guess those things will resolve itself more and more with time.

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Re: Likelihood of a crash and lump sum investing

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

You've come to the right place. Boglehead experts will support you.

A good reason, but not a definitive reason, for dollar cost averaging even if you have a lump sum is to preserve one's sleep factor.

Perhaps just invest as much as you are comfortable, when you are comfortable. If you find yourself waking up at night to check the fund price then take a break.

If you find yourself on Morningstar or . . . eggads. . . Zerohedge. . .and worrying, take a break. You have to do what fits you. It's not all numbers.

Some folks can jump into the pond all at once, others have to wade in a toe at a time. :shock:

Good luck.

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