Fixed income windfall allocation: lump sum or steadily buy?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Mon Apr 30, 2018 12:53 pm

We have a portfolio that was given to us and we let it idle for years. We've taken it over and decided on our AA. For equities, after reading the Vanguard study comparing immediate investment vs DCA, we're going to Value Average our equities in over the next 12 months. We risk less gain, particularly in the short-term, but we'll also reduce risk. We're happy with that.

But what about fixed income? I could be totally happy throwing 100% of our fixed income allocation into our chosen options right away, but what's the wisdom regarding this? I'm currently buying 2 yr CDs in retirement accounts and will max that out asap. In taxable we have some in a 2% savings account, and I'll need to get some CDs and Treasuries there as well.

We have over $200,000 to put in fixed income, then twice that in munis that we need to sell and reinvest in CDs and Treasuries, which will yield a little higher for us.

Should I trickle it in to leave some available for rising interest rates, or just fill up our fixed income allocation right away?

Mid 30s, 12% federal, 4% state

User avatar
saltycaper
Posts: 2650
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by saltycaper » Mon Apr 30, 2018 1:31 pm

TreadLightly wrote:
Mon Apr 30, 2018 12:53 pm

But what about fixed income? I could be totally happy throwing 100% of our fixed income allocation into our chosen options right away, but what's the wisdom regarding this?
If you have an asset allocation you have chosen, no wisdom is required to excuse yourself to immediately move to that asset allocation. What would need to be justified is not investing according to your asset allocation right away. The correct answer is always to move to your chosen AA right away unless there are severe tax issues, logistical issues, psychological issues that are impossible to overcome, or you want to try to time the market. But in the last case, the question is not for you ask but rather for you to answer (even if only to yourself): what is the wisdom of trying to time the market?
Quod vitae sectabor iter?

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by dbr » Mon Apr 30, 2018 4:57 pm

saltycaper wrote:
Mon Apr 30, 2018 1:31 pm
TreadLightly wrote:
Mon Apr 30, 2018 12:53 pm

But what about fixed income? I could be totally happy throwing 100% of our fixed income allocation into our chosen options right away, but what's the wisdom regarding this?
If you have an asset allocation you have chosen, no wisdom is required to excuse yourself to immediately move to that asset allocation. What would need to be justified is not investing according to your asset allocation right away. The correct answer is always to move to your chosen AA right away unless there are severe tax issues, logistical issues, psychological issues that are impossible to overcome, or you want to try to time the market. But in the last case, the question is not for you ask but rather for you to answer (even if only to yourself): what is the wisdom of trying to time the market?
Absolutely. That is well said. It is hard to understand why someone who has decided to be in a certain portfolio would then turn around and not be in it. Practical reasons mentioned could apply. One is you might not want a dozen moves of money going on all at once and end up with you, the bank, or the broker making mistakes.

User avatar
Taylor Larimore
Advisory Board
Posts: 27329
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by Taylor Larimore » Mon Apr 30, 2018 5:16 pm

Should I trickle it in to leave some available for rising interest rates, or just fill up our fixed income allocation right away?
TredLightly:

Economist John Kenneth Galbraith had this to say about forecasting interest rates:
“There are two kinds of forecasters: those who don't know, and those who don't know they don't know,”
Your stock/bond ratio is your most important portfolio decision. In my opinion, you should attain it as soon as possible.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

FinancialDave
Posts: 1579
Joined: Thu May 26, 2011 9:36 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by FinancialDave » Mon Apr 30, 2018 5:27 pm

With interest rates inside brokerage accounts now above 1% (about 1.6% right now -VMMXX) I see no need to PILE INTO interest rate risk all at once by investing all $200k into bonds at one time. Certainly if you are going to buy short term bond funds, most of them are not even going to make the 1.6% hurdle.

In your mid 30's you are in a great place. If it was me in that situation I would still probably do 4 equal installments into your bond fund(3) over the next 4 quarters.

Dave
I love simulated data. It turns the impossible into the possible!

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Mon Apr 30, 2018 6:05 pm

saltycaper wrote:
Mon Apr 30, 2018 1:31 pm
TreadLightly wrote:
Mon Apr 30, 2018 12:53 pm

But what about fixed income? I could be totally happy throwing 100% of our fixed income allocation into our chosen options right away, but what's the wisdom regarding this?
If you have an asset allocation you have chosen, no wisdom is required to excuse yourself to immediately move to that asset allocation. What would need to be justified is not investing according to your asset allocation right away. The correct answer is always to move to your chosen AA right away unless there are severe tax issues, logistical issues, psychological issues that are impossible to overcome, or you want to try to time the market. But in the last case, the question is not for you ask but rather for you to answer (even if only to yourself): what is the wisdom of trying to time the market?
OK so it's recommended to move 100% into fixed income right away, just the same as equities. I just didn't know how it was addressed that if bought all at once you won't have much liquid for a while.

The equities, yeah for us psychologically to invest so much, we've looked at the studies and chosen 12 months as a good risk/return/psychological health balance :)

Thanks for the input!

123
Posts: 3634
Joined: Fri Oct 12, 2012 3:55 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by 123 » Mon Apr 30, 2018 6:27 pm

TreadLightly wrote:
Mon Apr 30, 2018 12:53 pm
...Should I trickle it in to leave some available for rising interest rates, or just fill up our fixed income allocation right away?...
It is easiest if you develop an overall fixed income strategy first. If you're not going a mutual fund/ETF route to let the investment companies handle the reinvestment issues for you then you need to decide what percentages you want in the various instrument categories, MMF, CDs, munis, corporates, treasuries etc. Within most categories you need to establish some maturity and investment quality parameters. Once you've got your category allocations and your parameters you start investing. You really need to have an overall strategy, otherwise it will become a headache and burden every time something, like a CD, matures. Fixed income investing with a strategy of just "buying something with the best return" doesn't save you from junk bonds. Unless you've got a lot of time to devote to it it seems unlikely that you can get a better return than mutual funds or ETFs. Of course one of the main reasons people decide to hold individual issues is to have the appearance of no loss of principal, which might not hold true if you are investing in individual munis or corporate securites. If you hold individual issues of munis or corporates you also have to realize that as an individual investor you will end up paying higher prices because you cannot compete with institutional investors who are buying lots of securities that are extraordinarily larger than what you are buying.
The closest helping hand is at the end of your own arm.

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Mon Apr 30, 2018 6:33 pm

Taylor Larimore wrote:
Mon Apr 30, 2018 5:16 pm
Should I trickle it in to leave some available for rising interest rates, or just fill up our fixed income allocation right away?
TredLightly:

Economist John Kenneth Galbraith had this to say about forecasting interest rates:
“There are two kinds of forecasters: those who don't know, and those who don't know they don't know,”
Your stock/bond ratio is your most important portfolio decision. In my opinion, you should attain it as soon as possible.

Best wishes.
Taylor
Not interested in forecasting, just a poorly phrased question about whether we should get into our fixed income all at once or not. I just was asking whether Bogleheads go all in at once or slowly. I've got no psychological hold up with investing fixed income all at once.

Regarding attaining the AA asap: The Vanguard study found that in 2/3 cases, immediate investment was better...1/3 time immediate investment didn't beat "strategic implementation" over 12 months. The study also acknowledges that while you may forfeit higher returns, you do (or may, I'm going from memory here) reduce risk by spreading out the investment.

We're young and extremely grateful for this gift, and are willing to sacrifice a little return in exchange for less risk. We have low need for risk, not that we don't want returns! But only as long as it's a reasonable trade-off. The Vanguard study makes me feel yes, but if there's a better resource I'm open to change.

This is pretty much all I know on the topic, so this is an honest question. If findings are clear that it's not worthwhile to reduce risk by investing over a year, well I'll change my mind. Up until now I haven't had a chance to see anything concrete that shows "invest right away or the loss isn't worth the reduced risk." That said, I've had limited chance to read, which is why I come to the experts!

(Also, thanks to you for making me see the Boglehead light with my first Boglehead read with the Guide to Investing).

JustinR
Posts: 685
Joined: Tue Apr 27, 2010 11:43 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by JustinR » Mon Apr 30, 2018 6:36 pm

TreadLightly wrote:
Mon Apr 30, 2018 6:05 pm
OK so it's recommended to move 100% into fixed income right away, just the same as equities. I just didn't know how it was addressed that if bought all at once you won't have much liquid for a while.

The equities, yeah for us psychologically to invest so much, we've looked at the studies and chosen 12 months as a good risk/return/psychological health balance :)

Thanks for the input!
You did your research and decided you want a 66% chance to do worse?

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Mon Apr 30, 2018 6:52 pm

JustinR wrote:
Mon Apr 30, 2018 6:36 pm
TreadLightly wrote:
Mon Apr 30, 2018 6:05 pm
OK so it's recommended to move 100% into fixed income right away, just the same as equities. I just didn't know how it was addressed that if bought all at once you won't have much liquid for a while.

The equities, yeah for us psychologically to invest so much, we've looked at the studies and chosen 12 months as a good risk/return/psychological health balance :)

Thanks for the input!
You did your research and decided you want a 66% chance to do worse?
Isn't that kind of like choosing a lower AA, bc you are OK with accepting lower return for less risk? They didn't enumerate in any way how it reduces risk, as I guess that wasn't the study's focus, but doing the best I can with what I've got it's the best I could do.

Are there more inclusive studies that show that the reduced return isn't worth the reduced risk?

Telloverture
Posts: 9
Joined: Mon Apr 23, 2018 8:05 am

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by Telloverture » Mon Apr 30, 2018 7:49 pm

To me the question for fixed income is very different than it is for equities.

It's less about dollar cost averaging "into the asset class" and more about where you want to be on the interest rate and credit risk spectrum. Right now, with the 10-2 yr spread at around 50bps I don't think you're getting paid a lot for taking more interest rate risk. So my view is stay shorter and gradually go out the yield curve as you reinvest if it starts to steepen a bit.

Similarly, while spreads have widened some, by historical standards you're not getting very much compensation for credit risk. My view is stay higher quality and away from junk. Again, you can gradually add some credit risk over time.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by dbr » Mon Apr 30, 2018 7:51 pm

TreadLightly wrote:
Mon Apr 30, 2018 6:33 pm


Regarding attaining the AA asap: The Vanguard study found that in 2/3 cases, immediate investment was better...1/3 time immediate investment didn't beat "strategic implementation" over 12 months. The study also acknowledges that while you may forfeit higher returns, you do (or may, I'm going from memory here) reduce risk by spreading out the investment.

That is a misunderstanding that Vanguard should never have stated that way. This is not about a strategy that "beats" another strategy part of the time. It is about the fact that given the variability inherent in returns a lower returning strategy will some fraction of the time produce higher return than a higher returning strategy. But outcome should not be confused with strategy.

The other side of it is that naturally on average a lower returning less risky strategy is, of all things, lower returning and less risky. But the point is that if you intend to take risk for higher expected return, what do you have to gain by not taking the risk and not having an expectation of the return. That makes no sense. It may be that the investor thinks thus way because he is not comfortable with the risk and thinks he can end run it, but it doesn't work that way past the time to get fully invested. If the investor is not comfortable with the risk, he should rethink his overall plan.

The only other angle on this is that the investor somehow knows that now is not a good time to invest and that if he waits awhile it will be a better time. You already know what to think of that.

Dottie57
Posts: 4318
Joined: Thu May 19, 2016 5:43 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by Dottie57 » Mon Apr 30, 2018 8:07 pm

Make sure you know the percentage of your portfolio you want in fixed income and stocks. This is your biggest decision.

I am 50/50 stock/bonds since I retired this year.

Bonds are mostly intermediate blend of investment grade corporate and treasuries

Stocks are split between total U.S. stock market and toral international stocks at 70% /30% allocation.

I put it all in at once. Better to have it in market.

dknightd
Posts: 724
Joined: Wed Mar 07, 2018 11:57 am

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by dknightd » Mon Apr 30, 2018 8:37 pm

TreadLightly wrote:
Mon Apr 30, 2018 12:53 pm
We have a portfolio that was given to us and we let it idle for years.
How is the portfolio invested now? You've let it sit for years, I would not be in a rush to change that.
Maybe get to your desired AA over a year, maybe two? Unless it is already close I don't see the need to rush.
Studies show that going all in all at once wins about 2/3 of the time. You have been happily sitting on it for years. My guess is you would be happier changing things slowly.

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Mon Apr 30, 2018 8:44 pm

123 wrote:
Mon Apr 30, 2018 6:27 pm
TreadLightly wrote:
Mon Apr 30, 2018 12:53 pm
...Should I trickle it in to leave some available for rising interest rates, or just fill up our fixed income allocation right away?...
It is easiest if you develop an overall fixed income strategy first. If you're not going a mutual fund/ETF route to let the investment companies handle the reinvestment issues for you then you need to decide what percentages you want in the various instrument categories, MMF, CDs, munis, corporates, treasuries etc. Within most categories you need to establish some maturity and investment quality parameters. Once you've got your category allocations and your parameters you start investing. You really need to have an overall strategy, otherwise it will become a headache and burden every time something, like a CD, matures. Fixed income investing with a strategy of just "buying something with the best return" doesn't save you from junk bonds. Unless you've got a lot of time to devote to it it seems unlikely that you can get a better return than mutual funds or ETFs. Of course one of the main reasons people decide to hold individual issues is to have the appearance of no loss of principal, which might not hold true if you are investing in individual munis or corporate securites. If you hold individual issues of munis or corporates you also have to realize that as an individual investor you will end up paying higher prices because you cannot compete with institutional investors who are buying lots of securities that are extraordinarily larger than what you are buying.
Thanks we're not buying anything other than CDs, Treasuries, VTSAX, AND VTIAX right now. For what I would be putting in short term fixed income, I've put it in a 2% savings account. I don't know if this makes sense, but I know ppl ladder to keep some cycling, so for short term fixed income the savings account was higher. Maybe I should just put all fixed income allocation in longer term (2-3 yr) higher yield CDs? Our retirement accounts are almost filled with CDs, so everything else is in taxable.

We have so much to invest that it's overwhelming and we're just tying not to screw it up after realizing how poorly Merrill Lynch did with it over the last 5 yrs.

We're selling our munis, either this year or next year, we didn't buy them and they're not best for us anyway.

So you think we should keep a set % of CDs, Treasuries, etc? I'd just planned on picking whichever wound up being the best when the time came.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by dbr » Mon Apr 30, 2018 8:47 pm

dknightd wrote:
Mon Apr 30, 2018 8:37 pm

Studies show that going all in all at once wins about 2/3 of the time.
Lump sum is always the winning strategy. It wins by producing a higher return than DCA 2/3 of the time. One does not say the Eagles won 41/74 of the Super Bowl because that is the fraction of the total points they got.

User avatar
randomizer
Posts: 1458
Joined: Sun Jul 06, 2014 3:46 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by randomizer » Mon Apr 30, 2018 8:47 pm

Seems irrational to want to value average equities but lump sum fixed income. Just lump it all.
87.5:12.5, EM tilt — HODL the course!

yogesh
Posts: 102
Joined: Thu Oct 11, 2012 6:20 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by yogesh » Mon Apr 30, 2018 8:52 pm

Keep it simple per your goal term...
1yr: FDIC, CDs
3yr: Short Muni, Limited Muni, CDs
5yr: Intermediate Muni
10yr+: Lifestrategy, TR or 3-Fund
Emergency: FDIC | Taxable: VT | Retirement: TR2040

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Mon Apr 30, 2018 9:11 pm

dknightd wrote:
Mon Apr 30, 2018 8:37 pm
TreadLightly wrote:
Mon Apr 30, 2018 12:53 pm
We have a portfolio that was given to us and we let it idle for years.
How is the portfolio invested now? You've let it sit for years, I would not be in a rush to change that.
Maybe get to your desired AA over a year, maybe two? Unless it is already close I don't see the need to rush.
Studies show that going all in all at once wins about 2/3 of the time. You have been happily sitting on it for years. My guess is you would be happier changing things slowly.
When it was given to us, we were assured it was solid, and we didn't know any better. I'd do my best to talk things out with the advisor, but he was so all over the place I was all the more confused after talking to him. I think he intentionally made us feel like we could never manage such a portfolio.

I started looking into it recently, someone on Reddit recommended the Boglehead's Guide to Investing, and since then we've banged our heads against the wall for being so stupid. We've taken over 1.5 million from Merrill Lynch to Vanguard and Fidelity, some of which has just settled this week.

We had...63% in cash/12% equities/25% bonds. Cash wasn't even money market, it was making 0.48%. I had no idea. I can't believe how bad it was. I've put some in VTSAX, VTIAX, and CDs. I'm doing the best I can, but I'm learning as I go. Last week I took it down to 53% cash/17% equities/30% bonds. I also put some of the cash in a 2% savings account.

We've settled on 50%/50% based on advice here that maybe Bill Berenstein says "stop playing if you've already won"? I feel like the projected returns on Vanguard for a 50/50 allocation are OK for me if it means we're less likely to lose what we were given. More than likely, once we get comfortable we may choose to raise equities a little higher. We'll see. It's so arbitrary it's hard for me.

Everything has just settled in the last week from the move, so I'm just really getting my hands on it and starting to act. I'm fine putting all of our fixed income allocation in right away. That doesn't bother me. It's the equities that I feel safer if I spread it out over a year of market fluctuation. I'm OK losing some gain to trade it for less risk of putting so much money in at once. My luck it would be the day before I should have :)

If that's a false sense of security I get from spreading it out, I'm open to change if findings are that the lost return isn't worth the reduced risk from spreading it out over a year.

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Mon Apr 30, 2018 9:24 pm

Telloverture wrote:
Mon Apr 30, 2018 7:49 pm
To me the question for fixed income is very different than it is for equities.

It's less about dollar cost averaging "into the asset class" and more about where you want to be on the interest rate and credit risk spectrum. Right now, with the 10-2 yr spread at around 50bps I don't think you're getting paid a lot for taking more interest rate risk. So my view is stay shorter and gradually go out the yield curve as you reinvest if it starts to steepen a bit.

Similarly, while spreads have widened some, by historical standards you're not getting very much compensation for credit risk. My view is stay higher quality and away from junk. Again, you can gradually add some credit risk over time.
Thanks for the advice. In retirement we're buying 2-3 yr CDs with all the cash we have. They already held some equities, which we can sell next year as we got enough LTCG this year from selling our high ER equities. For fixed income in taxable, I've looked at the same CDs and some Treasuries, both of which are better returns than the munis we have bc of our low bracket. Does this sound along the lines of what you recommend?

I've not looked much into corporate bonds, but maybe one day they can be a part of our portfolio. I'm not much of a gambler though, I can't imagine ever getting anything with risky credit rating. "Save the risk for equities" I think is what Rick von Ness said, and it makes sense to me.

JustinR
Posts: 685
Joined: Tue Apr 27, 2010 11:43 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by JustinR » Mon Apr 30, 2018 9:27 pm

If you're just beginning and afraid you might do something wrong and so you want to ease into it, that's fine. But spreading it out is objectively a worse strategy than putting it all in at once.

As a strategy, it's not grounded in any logic and is basically a fake psychological trick.

A simple example is you have $1,200,000 which you decide to spread out over the year. Once you're all in, you're given the choice to take everything back out (tax free) and spread it out again over the next year. Would you do that? Of course you wouldn't. So why do it the first year?

123
Posts: 3634
Joined: Fri Oct 12, 2012 3:55 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by 123 » Mon Apr 30, 2018 9:35 pm

TreadLightly wrote:
Mon Apr 30, 2018 8:44 pm
So you think we should keep a set % of CDs, Treasuries, etc? I'd just planned on picking whichever wound up being the best when the time came.
I'd say that CDs and Treasuries are pretty much equivalent. CDs often take a certain amount of effort to reinvest, whether it's shopping for rates or moving the money (unless it's brokered CDs). If you can find a maturity "sweet spot" you're happy with Treasuries can be setup to be automatically reinvested at maturity at either TreasuryDirect or some brokers like Fidelity. Of course with either CDs or Treasuries I'd assume you'd split the money up into some kind of ladder.

Edited to add:
If your state has a significant income tax sometimes you can tolerate a lower Treasury interest rate if you don't have to pay tax on the interest on the state side.
The closest helping hand is at the end of your own arm.

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Mon Apr 30, 2018 9:38 pm

One point that I'd forgotten, is that the study left assets to be invested in cash. They didn't invest more heavily in bonds, then steadily transition to greater equity allocation. So while that wouldn't change the overall findings of the study, at least maybe it would make the outcome a little closer if you kept 100% invested while you worked your equities up.

The study is from Vanguard and called "Invest Now or Temporarily Hold Your Cash?"

As the conclude, "Our analysis indicates that investing immediately has provided better portfolio returns on average than temporarily holding cash."

So this is hardly a comparison between immediate investment into your chosen AA vs being bond heavy initially, and slowly converting to your AA. Does anyone know of a more appropriate study that isn't just comparing immediate investment to holding cash?

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Mon Apr 30, 2018 9:44 pm

randomizer wrote:
Mon Apr 30, 2018 8:47 pm
Seems irrational to want to value average equities but lump sum fixed income. Just lump it all.
Maybe it is, maybe it's not. I don't know enough. This is how my newbie brain sees it:

I see inflation risk and opportunity risk as the greatest risks with fixed income, and they're probably not going to kill you.

With the equities, I see it as Vanguard in this study described it as "such an approach can moderate the impact of an immediate market dip." That's pretty much all there is to my thinking. If there's a good dip I'd sure as heck like to get a chance at catching it vs investing everything the day before. I may not catch the next recession by spreading it out, but maybe I can catch some low spots.

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Mon Apr 30, 2018 9:48 pm

JustinR wrote:
Mon Apr 30, 2018 9:27 pm
If you're just beginning and afraid you might do something wrong and so you want to ease into it, that's fine. But spreading it out is objectively a worse strategy than putting it all in at once.
I'm not loving the Vanguard study I was looking at before, as they left their reserves in cash vs bonds. Do you know of a study where they conclude that immediate investment is better than slowly changing your AA until your final chosen one? I'm sure they must exist.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by dbr » Mon Apr 30, 2018 9:53 pm

TreadLightly wrote:
Mon Apr 30, 2018 9:38 pm
One point that I'd forgotten, is that the study left assets to be invested in cash. They didn't invest more heavily in bonds, then steadily transition to greater equity allocation. So while that wouldn't change the overall findings of the study, at least maybe it would make the outcome a little closer if you kept 100% invested while you worked your equities up.

The study is from Vanguard and called "Invest Now or Temporarily Hold Your Cash?"

As the conclude, "Our analysis indicates that investing immediately has provided better portfolio returns on average than temporarily holding cash."

So this is hardly a comparison between immediate investment into your chosen AA vs being bond heavy initially, and slowly converting to your AA. Does anyone know of a more appropriate study that isn't just comparing immediate investment to holding cash?
On average the whole thing is nothing more than expected return over time. The expected return of cash and bonds ranges from 0% nominal for currency up through maybe 6% or 7% for high yield corporates. Expected return for stocks is in the range 18%-25%. So you pick the allocation as a function of time, plug in the appropriate returns and compute an expected portfolio value or expected compound annual growth rate. Bonds with higher expected return would come closer to the average result for stocks than cash would. If you want to know what the odds are that at the end of any length of time one set of allocations comes out higher than another set of allocations you have to convolute the probabilty distribution of returns for the two cases and produce two distributions of outcomes and compute a frequency of the one coming out higher than the other as a probability. This is not different from doing the same thing for static asset allocations where cash or bonds deliver higher performance than these stocks or those stocks in some periods of time. In that case the more volatile the lower returning allocation is the better chance it has of delivering more return than the other allocation, and also the more chance it has of being far less than the other allocation.

Telloverture
Posts: 9
Joined: Mon Apr 23, 2018 8:05 am

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by Telloverture » Mon Apr 30, 2018 9:57 pm

TreadLightly wrote:
Mon Apr 30, 2018 9:24 pm
Telloverture wrote:
Mon Apr 30, 2018 7:49 pm
To me the question for fixed income is very different than it is for equities.

It's less about dollar cost averaging "into the asset class" and more about where you want to be on the interest rate and credit risk spectrum. Right now, with the 10-2 yr spread at around 50bps I don't think you're getting paid a lot for taking more interest rate risk. So my view is stay shorter and gradually go out the yield curve as you reinvest if it starts to steepen a bit.

Similarly, while spreads have widened some, by historical standards you're not getting very much compensation for credit risk. My view is stay higher quality and away from junk. Again, you can gradually add some credit risk over time.
Thanks for the advice. In retirement we're buying 2-3 yr CDs with all the cash we have. They already held some equities, which we can sell next year as we got enough LTCG this year from selling our high ER equities. For fixed income in taxable, I've looked at the same CDs and some Treasuries, both of which are better returns than the munis we have bc of our low bracket. Does this sound along the lines of what you recommend?

I've not looked much into corporate bonds, but maybe one day they can be a part of our portfolio. I'm not much of a gambler though, I can't imagine ever getting anything with risky credit rating. "Save the risk for equities" I think is what Rick von Ness said, and it makes sense to me.
It's going to be specific to your situation with your tax bracket, etc., but in general with the shape of the yield curve you're not really getting paid much for going out more than 2 years. If and when you're ready to take on some more interest rate and credit risk an ETF like BND or AGG will give very cheap, liquid, and diversified exposure (with no junk.)

User avatar
saltycaper
Posts: 2650
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by saltycaper » Mon Apr 30, 2018 10:58 pm

TreadLightly wrote:
Mon Apr 30, 2018 6:05 pm

OK so it's recommended to move 100% into fixed income right away, just the same as equities. I just didn't know how it was addressed that if bought all at once you won't have much liquid for a while.
If Treasuries are part of your fixed income allocation, they are one of the most liquid investments you can buy, (unless, maybe, if you are using TreasuryDirect or if there is some other hurdle for selling.) Spreads are tight, volume is high, and trading costs are low. If you mean you don't know how much they will be worth at some point in the future, that's due to term risk, not liquidity risk, and you can reduce your term risk simply by buying shorter-term Treasuries.

If inflation risk troubles you, consider I bonds and/or TIPS. (Take care if buying individual TIPS in a taxable account due to potential tax reporting issues.) Or just stick with shorter-term nominal Treasuries.
TreadLightly wrote:
Mon Apr 30, 2018 9:44 pm
With the equities, I see it as Vanguard in this study described it as "such an approach can moderate the impact of an immediate market dip." That's pretty much all there is to my thinking. If there's a good dip I'd sure as heck like to get a chance at catching it vs investing everything the day before. I may not catch the next recession by spreading it out, but maybe I can catch some low spots.
There's nothing stopping you from doing this at any point in time, even after you are fully invested. If you are thinking about abiding by a "buy and hold" strategy, and thus thinking you have only one shot to get in at a good price, realize this is a self-imposed constraint that doesn't exist outside of your mind. You can transact at any time. That is not an invitation into temptation but a hope you will free your mind. We all want to buy at more advantageous prices, but, consider, if you think you can do it now, why can't you do it later? And if you don't think you can do it later, why do you think you can do it now?
Quod vitae sectabor iter?

NYCwriter
Posts: 153
Joined: Thu Sep 17, 2015 12:46 am

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by NYCwriter » Mon Apr 30, 2018 11:13 pm

You could do a portion in Muni funds in taxable depending on your need to reduce tax liability, but they do carry risk. It really does depend on whether the tax savings is worth the risk.

Aside from whatever allocation you want to maintain, CDs are getting better returns, so a CD ladder, followed by a higher yield MM (only if you don't have sufficient liquid funds already). With more than 2+ on 1yr, a CD ladder 3-12 months allows you to roll out for the higher expected yields down the line.

MotoTrojan
Posts: 2121
Joined: Wed Feb 01, 2017 8:39 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by MotoTrojan » Mon Apr 30, 2018 11:53 pm

JustinR wrote:
Mon Apr 30, 2018 9:27 pm
If you're just beginning and afraid you might do something wrong and so you want to ease into it, that's fine. But spreading it out is objectively a worse strategy than putting it all in at once.

As a strategy, it's not grounded in any logic and is basically a fake psychological trick.

A simple example is you have $1,200,000 which you decide to spread out over the year. Once you're all in, you're given the choice to take everything back out (tax free) and spread it out again over the next year. Would you do that? Of course you wouldn't. So why do it the first year?
Was gonna post this. It’s all a mind trick but with this analogy it becomes clear why it’s a flawed strategy.

I’ll be investing tomorrow no matter what. The windfall I’m tossing in will nearly double my portfolio. Very happy that this analogy has helped me adapt this strategy. Takes all the guessing out of it :).

Read up on tax-loss harvesting. If there is a downturn after a lump-sum, this benefit will help settle your regret.

VaR
Posts: 583
Joined: Sat Dec 05, 2015 11:27 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by VaR » Tue May 01, 2018 1:29 am

TreadLightly wrote:
Mon Apr 30, 2018 12:53 pm
Should I trickle it in to leave some available for rising interest rates, or just fill up our fixed income allocation right away?

Mid 30s, 12% federal, 4% state
1. What is your current allocation percentage now? If one of your options is to value average into *both* equities and fixed income, then the funds must be sitting in some *other* asset class. Is it sitting in a demand deposit account or the money market? Note that CDs count as fixed income.
2. You've said that you're going to value average into equities over the next year. Where do you intend this money to sit during this period?
3. What is your intended equity/fixed income asset allocation?
4. What is your target fixed income implementation? Intermediate term Treasurys? Total Bond?

Why am I asking these questions? Because I suspect that over the next 12 months you're going to have money in 3 pools:
Pool 1. Invested in your chosen equity fund - Total Stock or a mix of Total Stock and Total International Stock. Say 6% now and 80% in a year
Pool 2. Invested in your strategic fixed income fund - Total Bond or Intermediate Term Treasury or Intermediate Term Investment Grade, etc. Say 20% now.
Pool 3. Invested in some interim holding fund "waiting" to be invested in equities. Say 72% now and 0% in a year.

In my mind, the only question is where you should put Pool 3. I'd suggest a short term bond fund or even a money market fund.

I suspect that if you think of it this way, you'll see that you don't need to "average" your way into your strategic fixed income fund to reduce risk because your risk is already massively reduced by having a large percentage of your money in Pool 3.

Note: If it were me I would lump sum everything. Your investment horizon is so long that I wouldn't worry about a short term dip that has only happened 1/3 of the time anyway vs giving up half a year of gains 2/3 of the time. After all, 2/9ths of the time what happens is that you get all in after a year and *then* have to stomach a dip right then! In that case you'd be better off having that full year of buffer gains built up. :)

User avatar
House Blend
Posts: 4484
Joined: Fri May 04, 2007 1:02 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by House Blend » Tue May 01, 2018 9:47 am

I'm firmly on the lump sum side of the debate, but want to point out that the parameters of the decision are not always presented well.

That is, especially for a newbie with a lump sum to invest (perhaps an inheritance), the most likely starting point is that he doesn't know or understand his risk tolerance. He may say that "I want an 80:20 portfolio," but the reality may be that he got that from filling out a questionnaire or reading bogleheads.org (like all the cool kids). He actually has no idea.

In short, being attracted to moving slowly to a new allocation may be a symptom of not knowing one's risk tolerance.

And surely even lump-summers agree that going from cash to 80/20 in one step is a bad idea if you don't have the ability to maintain that allocation during a crash.

Perhaps a better strategy for those who recognize that they don't know their risk tolerance is to pick a lower-risk allocation that one is willing to lump into in one step, not the higher risk allocation that everyone says is right for you. After a decade or two (or the next market crash), you'll probably have a better idea what AA actually makes sense for you. If you no longer need advice from Bogleheads about your AA, that's a sign that you know your risk tolerance and lump sum will seem obvious.

User avatar
BL
Posts: 8241
Joined: Sun Mar 01, 2009 2:28 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by BL » Tue May 01, 2018 10:11 am

Now that your head is spinning with all the suggestions, it is time to start making a plan. First, decide how much goes where (AA). X% US stock market, Y% international s.m., Z% fixed income.

1. Do you have anything in equities (stock funds) now? If you plan to buy different stock funds, this is just a sideways move and could just as well be done now, unless Capital Gains for selling is a factor.

2. If money is sitting in some type of fixed income, the amount going to fixed is just a lateral move so move it all to the type of fixed you have decided upon.

3. Put in as much in equities now as you can handle. plan on monthly deposits for up to a year to complete your plan. If it makes you uncomfortable, lower the equity % of your plan, at least until you are comfortable with more equities.

2a. for fixed income, I would consider a combination of durations, some short, some mid-term, maybe some longer especially if not too great a loss to cash in early, as the rates seem to be increasing slowly but steadily now. We bought some 1 - 1.25 year PenFed CDs (certificates) last year and current rates are higher, so am glad some will be available to buy at higher rates now. Vanguard's Prime Money Market has increased to >1.8% so that is becoming decent for relatively short-term savings. Longer term gives higher current rates but may not keep up with new issues as rates increase. Guess a mix may be the way to go.

New I-Bonds are now at 2.52 (including 0.3% fixed rate) and follow inflation.

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Fri May 04, 2018 1:09 pm

VaR wrote:
Tue May 01, 2018 1:29 am
TreadLightly wrote:
Mon Apr 30, 2018 12:53 pm
Should I trickle it in to leave some available for rising interest rates, or just fill up our fixed income allocation right away?

Mid 30s, 12% federal, 4% state
1. What is your current allocation percentage now? If one of your options is to value average into *both* equities and fixed income, then the funds must be sitting in some *other* asset class. Is it sitting in a demand deposit account or the money market? Note that CDs count as fixed income.
2. You've said that you're going to value average into equities over the next year. Where do you intend this money to sit during this period?
3. What is your intended equity/fixed income asset allocation?
4. What is your target fixed income implementation? Intermediate term Treasurys? Total Bond?

Why am I asking these questions? Because I suspect that over the next 12 months you're going to have money in 3 pools:
Pool 1. Invested in your chosen equity fund - Total Stock or a mix of Total Stock and Total International Stock. Say 6% now and 80% in a year
Pool 2. Invested in your strategic fixed income fund - Total Bond or Intermediate Term Treasury or Intermediate Term Investment Grade, etc. Say 20% now.
Pool 3. Invested in some interim holding fund "waiting" to be invested in equities. Say 72% now and 0% in a year.

In my mind, the only question is where you should put Pool 3. I'd suggest a short term bond fund or even a money market fund.

I suspect that if you think of it this way, you'll see that you don't need to "average" your way into your strategic fixed income fund to reduce risk because your risk is already massively reduced by having a large percentage of your money in Pool 3.

Note: If it were me I would lump sum everything. Your investment horizon is so long that I wouldn't worry about a short term dip that has only happened 1/3 of the time anyway vs giving up half a year of gains 2/3 of the time. After all, 2/9ths of the time what happens is that you get all in after a year and *then* have to stomach a dip right then! In that case you'd be better off having that full year of buffer gains built up. :)
1. We are currently 53% cash/17% equities/30% bonds. We've increased bonds and equities to this ratio last week. I've moved our cash to a 2% savings account and some in the Prime MM for availability. On one hand I feel like compared to our current state, an immediate buy into fixed income couldn't hurt us more than just being in cash can. But I want to make informed decisions when looking at 2 year terms. Overwhelming opinion is immediate, i'm just trying to get a solid understanding to go with the advice.
2. likely the 2% savings would remain the best short term spot, i'd watch yields and move if beneficial
3. 50/50 for now. once we get settled, and maybe find a dip, we may weigh a little heavier on stocks. we've come to this after advice on this forum due to our portfolio size. open to further advice.
4. target fixed income implementation is what happens to be the best choice at the time. i've taken full advantage of a veteran fixed income analyst here and he's advised that current best options are CDs and Treasuries, and that bond funds have underperformed comparatively. i can't explain the rationale as i don't fully understand it, so for now i'm just following it. once again, open to hearing recommendations.

Equity wise, we are buying only VTIAX and VTSAX. We still have some leftover ETFs because we have enough LTCG for this year, and we'll sell the rest next year. Bond fund wise, we've just been looking at CDs and Treasuries. I wish we could make more than this, but I've been following the advice i've gotten personally here, and haven't bought any bond funds.

Thanks for helping me through this. I respect the advice here, and when i fully walk through the options i know i can make a good one and stick to it.

EDIT: no, short term Treasuries will be a better taxable choice than 2% savings.
Last edited by TreadLightly on Fri May 04, 2018 3:29 pm, edited 1 time in total.

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Fri May 04, 2018 1:12 pm

MotoTrojan wrote:
Mon Apr 30, 2018 11:53 pm
JustinR wrote:
Mon Apr 30, 2018 9:27 pm
If you're just beginning and afraid you might do something wrong and so you want to ease into it, that's fine. But spreading it out is objectively a worse strategy than putting it all in at once.

As a strategy, it's not grounded in any logic and is basically a fake psychological trick.

A simple example is you have $1,200,000 which you decide to spread out over the year. Once you're all in, you're given the choice to take everything back out (tax free) and spread it out again over the next year. Would you do that? Of course you wouldn't. So why do it the first year?
Was gonna post this. It’s all a mind trick but with this analogy it becomes clear why it’s a flawed strategy.

I’ll be investing tomorrow no matter what. The windfall I’m tossing in will nearly double my portfolio. Very happy that this analogy has helped me adapt this strategy. Takes all the guessing out of it :).

Read up on tax-loss harvesting. If there is a downturn after a lump-sum, this benefit will help settle your regret.
i'm thick i guess. i don't see how this is the same. i'm not buying in then selling in a year, only to buy back into the same market that i sold in. i'm wondering if i should buy into the market from cash. maybe i need more explanation on how this example helps?

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Fri May 04, 2018 1:23 pm

BL wrote:
Tue May 01, 2018 10:11 am
Now that your head is spinning with all the suggestions, it is time to start making a plan. First, decide how much goes where (AA). X% US stock market, Y% international s.m., Z% fixed income.

1. Do you have anything in equities (stock funds) now? If you plan to buy different stock funds, this is just a sideways move and could just as well be done now, unless Capital Gains for selling is a factor.

2. If money is sitting in some type of fixed income, the amount going to fixed is just a lateral move so move it all to the type of fixed you have decided upon.

3. Put in as much in equities now as you can handle. plan on monthly deposits for up to a year to complete your plan. If it makes you uncomfortable, lower the equity % of your plan, at least until you are comfortable with more equities.

2a. for fixed income, I would consider a combination of durations, some short, some mid-term, maybe some longer especially if not too great a loss to cash in early, as the rates seem to be increasing slowly but steadily now. We bought some 1 - 1.25 year PenFed CDs (certificates) last year and current rates are higher, so am glad some will be available to buy at higher rates now. Vanguard's Prime Money Market has increased to >1.8% so that is becoming decent for relatively short-term savings. Longer term gives higher current rates but may not keep up with new issues as rates increase. Guess a mix may be the way to go.

New I-Bonds are now at 2.52 (including 0.3% fixed rate) and follow inflation.
We've currently chosen 50/50 based on advice on this forum. More than likely, if we feel we have gotten into a good dip, we will take the opportunity to hit up to 60 stocks/40 bonds.

1. 53% cash/17% equities/30% bonds. i've sold all of our high ER funds and maxed the LTCG we want this year, next year I'll sell the rest.
2. the big issue currently is our over a million in cash. that's my priority. most of our current bond allocation is muni bonds that we will be selling bc i've gotten help from user Kevin M to determine that Treasuries/CDs are better than our muni bonds because of our low income. that will need to be moved to CDs/Treasuries, but i'm focused on the black hole of cash
2a. current short term cash (to 9 months) is in a 2% savings account. over that and CDs/Treasuries are worthwhile.
3. That's our current plan. We'll be value averaging into equities over a year.

as of now, our retirement will be filled entirely with CDs, that's the plan at least. We don't have much in retirement relative to our portfolio size. i feel like i've been advised against TIPS an IBonds here, but i can't remember the rationale.

international allocation is currently flexible. vascillating btwn 20-30%, but i know this is a highly argued issue.

as always, open to advice :)

MotoTrojan
Posts: 2121
Joined: Wed Feb 01, 2017 8:39 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by MotoTrojan » Fri May 04, 2018 1:37 pm

TreadLightly wrote:
Fri May 04, 2018 1:12 pm
MotoTrojan wrote:
Mon Apr 30, 2018 11:53 pm
JustinR wrote:
Mon Apr 30, 2018 9:27 pm
If you're just beginning and afraid you might do something wrong and so you want to ease into it, that's fine. But spreading it out is objectively a worse strategy than putting it all in at once.

As a strategy, it's not grounded in any logic and is basically a fake psychological trick.

A simple example is you have $1,200,000 which you decide to spread out over the year. Once you're all in, you're given the choice to take everything back out (tax free) and spread it out again over the next year. Would you do that? Of course you wouldn't. So why do it the first year?
Was gonna post this. It’s all a mind trick but with this analogy it becomes clear why it’s a flawed strategy.

I’ll be investing tomorrow no matter what. The windfall I’m tossing in will nearly double my portfolio. Very happy that this analogy has helped me adapt this strategy. Takes all the guessing out of it :).

Read up on tax-loss harvesting. If there is a downturn after a lump-sum, this benefit will help settle your regret.
i'm thick i guess. i don't see how this is the same. i'm not buying in then selling in a year, only to buy back into the same market that i sold in. i'm wondering if i should buy into the market from cash. maybe i need more explanation on how this example helps?
Every single day you stay in the market, assuming it is a tax-advantaged account (no penalty to sell everything into "cash") you are deciding to buy the full market. It doesn't make a difference that some of it is principal and some is gains, you are still ACTIVELY deciding to stay invested. There is no difference with brand new principal being introduced into your portfolio. If your AA is correct for your situation, the only logical (emotions don't depend on logic) move is to lump-sum.

As said above, a $1M portfolio made up of 30 years of market returns is today no different than a $1M deposit into your checking account. If you are afraid to lump the new $1M in, you should be equally afraid leaving the 30 year accumulated $1M invested.

JustinR
Posts: 685
Joined: Tue Apr 27, 2010 11:43 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by JustinR » Fri May 04, 2018 3:04 pm

TreadLightly wrote:
Fri May 04, 2018 1:12 pm
MotoTrojan wrote:
Mon Apr 30, 2018 11:53 pm
JustinR wrote:
Mon Apr 30, 2018 9:27 pm
If you're just beginning and afraid you might do something wrong and so you want to ease into it, that's fine. But spreading it out is objectively a worse strategy than putting it all in at once.

As a strategy, it's not grounded in any logic and is basically a fake psychological trick.

A simple example is you have $1,200,000 which you decide to spread out over the year. Once you're all in, you're given the choice to take everything back out (tax free) and spread it out again over the next year. Would you do that? Of course you wouldn't. So why do it the first year?
Was gonna post this. It’s all a mind trick but with this analogy it becomes clear why it’s a flawed strategy.

I’ll be investing tomorrow no matter what. The windfall I’m tossing in will nearly double my portfolio. Very happy that this analogy has helped me adapt this strategy. Takes all the guessing out of it :).

Read up on tax-loss harvesting. If there is a downturn after a lump-sum, this benefit will help settle your regret.
i'm thick i guess. i don't see how this is the same. i'm not buying in then selling in a year, only to buy back into the same market that i sold in. i'm wondering if i should buy into the market from cash. maybe i need more explanation on how this example helps?
Let me simplify the example further.

Say you have $1,000,000 new money to invest on Jan 1, 2018. You decide to spread it out over the year. The market stays completely flat over this year, neither going up or down. On Dec 31, 2018 you're fully invested and your balance is still $1,000,000.

It's Jan 1, 2019. You can now withdraw the whole thing and repeat what you did in 2018, spreading it out throughout the year of 2019.

Do you do this?

Saying "No" would be the same as having $1m in cash and choosing to invest the whole amount on Jan 1, 2019. So why didn't you do the same in 2018?

-

To answer your question, my point is there's no difference between "buying into the market" and "selling everything, then buying back in". It's the same situation so why would you approach them differently?
Last edited by JustinR on Fri May 04, 2018 5:08 pm, edited 1 time in total.

JoeRetire
Posts: 1521
Joined: Tue Jan 16, 2018 2:44 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by JoeRetire » Fri May 04, 2018 3:47 pm

TreadLightly wrote:
Mon Apr 30, 2018 12:53 pm
But what about fixed income? I could be totally happy throwing 100% of our fixed income allocation into our chosen options right away, but what's the wisdom regarding this?
Doing things that make you totally happy seems wise to me.

TreadLightly
Posts: 140
Joined: Mon Mar 19, 2018 2:30 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by TreadLightly » Fri May 04, 2018 5:48 pm

JustinR wrote:
Fri May 04, 2018 3:04 pm
TreadLightly wrote:
Fri May 04, 2018 1:12 pm
MotoTrojan wrote:
Mon Apr 30, 2018 11:53 pm
JustinR wrote:
Mon Apr 30, 2018 9:27 pm
If you're just beginning and afraid you might do something wrong and so you want to ease into it, that's fine. But spreading it out is objectively a worse strategy than putting it all in at once.

As a strategy, it's not grounded in any logic and is basically a fake psychological trick.

A simple example is you have $1,200,000 which you decide to spread out over the year. Once you're all in, you're given the choice to take everything back out (tax free) and spread it out again over the next year. Would you do that? Of course you wouldn't. So why do it the first year?
Was gonna post this. It’s all a mind trick but with this analogy it becomes clear why it’s a flawed strategy.

I’ll be investing tomorrow no matter what. The windfall I’m tossing in will nearly double my portfolio. Very happy that this analogy has helped me adapt this strategy. Takes all the guessing out of it :).

Read up on tax-loss harvesting. If there is a downturn after a lump-sum, this benefit will help settle your regret.
i'm thick i guess. i don't see how this is the same. i'm not buying in then selling in a year, only to buy back into the same market that i sold in. i'm wondering if i should buy into the market from cash. maybe i need more explanation on how this example helps?
Let me simplify the example further.

Say you have $1,000,000 new money to invest on Jan 1, 2018. You decide to spread it out over the year. The market stays completely flat over this year, neither going up or down. On Dec 31, 2018 you're fully invested and your balance is still $1,000,000.

It's Jan 1, 2019. You can now withdraw the whole thing and repeat what you did in 2018, spreading it out throughout the year of 2019.

Do you do this?

Saying "No" would be the same as having $1m in cash and choosing to invest the whole amount on Jan 1, 2019. So why didn't you do the same in 2018?
-

To answer your question, my point is there's no difference between "buying into the market" and "selling everything, then buying back in". It's the same situation so why would you approach them differently?
ok, but what if the market takes a big dip in six months? sure, i won't sell, but i'll sure wish i'd have averaged it over a period. if it shoots up, i'll miss out, but risk/return is the name of the whole game. isn't it "safer" to pay the average price per share over an extended period?

sure, current market value of my account will fluctuate with the market, but how many shares, thus how much value, depends on the market value when i purchased my shares. so $100 per share of something i bought at $100 isn't looking as good as when i bought it at $80. sure, spreading it out over a year doesn't guarantee that i'll catch the low spots, but doesn't it make it more likely?

to be sure, i'm not arguing that i'm right. i'm explaining my thought process and genuinely trying to understand. i want to do what's best, not what feels instinctual, as i know that's not always right in the investing game.

JustinR
Posts: 685
Joined: Tue Apr 27, 2010 11:43 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by JustinR » Fri May 04, 2018 6:03 pm

TreadLightly wrote:
Fri May 04, 2018 5:48 pm
JustinR wrote:
Fri May 04, 2018 3:04 pm
Let me simplify the example further.

Say you have $1,000,000 new money to invest on Jan 1, 2018. You decide to spread it out over the year. The market stays completely flat over this year, neither going up or down. On Dec 31, 2018 you're fully invested and your balance is still $1,000,000.

It's Jan 1, 2019. You can now withdraw the whole thing and repeat what you did in 2018, spreading it out throughout the year of 2019.

Do you do this?

Saying "No" would be the same as having $1m in cash and choosing to invest the whole amount on Jan 1, 2019. So why didn't you do the same in 2018?
-

To answer your question, my point is there's no difference between "buying into the market" and "selling everything, then buying back in". It's the same situation so why would you approach them differently?
ok, but what if the market takes a big dip in six months? sure, i won't sell, but i'll sure wish i'd have averaged it over a period. if it shoots up, i'll miss out, but risk/return is the name of the whole game. isn't it "safer" to pay the average price per share over an extended period?

sure, current market value of my account will fluctuate with the market, but how many shares, thus how much value, depends on the market value when i purchased my shares. so $100 per share of something i bought at $100 isn't looking as good as when i bought it at $80. sure, spreading it out over a year doesn't guarantee that i'll catch the low spots, but doesn't it make it more likely?
No. The exact opposite. It makes it more likely you'll catch higher spots, because we expect the market will go up (the whole reason why we invest). So using your example, investing $100 looks better than $120 right?

FinancialDave
Posts: 1579
Joined: Thu May 26, 2011 9:36 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by FinancialDave » Sat May 05, 2018 12:14 am

MotoTrojan wrote:
Fri May 04, 2018 1:37 pm

As said above, a $1M portfolio made up of 30 years of market returns is today no different than a $1M deposit into your checking account. If you are afraid to lump the new $1M in, you should be equally afraid leaving the 30 year accumulated $1M invested.
That sounds just a little toooo academic for me.

In the first place I hope you aren't saying that a $1M portoflio is the same as having $1M in a checking account as this is something that only works in the classroom and not in real life. In real life say you have $1M of mutual funds at the close of business on Monday. On Tues morning you decide you want that million dollar portfolio in your checking account. You put a sell order in Tues 10 am. You look at your account on Wed morning and find that you only have $750,000 left -- oops, major banking crisis in the middle of the day and your account dropped 25% before it could be sold! Or market was closed for 3 days before your order could be excercised - that never happens :annoyed

Furthermore, investing has to deal with an element of the brain and economics that is called neuroeconomics and sometimes it is not only about the math, but about being able to sleep at night and stay invested.

Only the arrogant would take an individual with no invested money who just inherited $1M and put it all in the market in a single day, without any regard for what happened to be going on at the time in the market. While on paper the odds might look good, there is no excuse for getting hit by a bus crossing the street just because 90% of the time when people cross the street without looking they never get hit!

:oops:
I love simulated data. It turns the impossible into the possible!

VaR
Posts: 583
Joined: Sat Dec 05, 2015 11:27 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by VaR » Sat May 05, 2018 5:28 am

TreadLightly wrote:
Fri May 04, 2018 5:48 pm
ok, but what if the market takes a big dip in six months? sure, i won't sell, but i'll sure wish i'd have averaged it over a period. if it shoots up, i'll miss out, but risk/return is the name of the whole game. isn't it "safer" to pay the average price per share over an extended period?
But what if the market goes up 6% over the course of the next year and then takes a big 20% dip a year from now? You'd be down 17%. If you had lump summed now, you'd only be down 14%.

I used current equity over fixed-income return projections, but as an illustration if you use higher hypothetical returns for the next year the illustration becomes more clear. So for example if you use an astounding 20% return in the next year vs a 20% dip a year from now, lump sum gets back to even while value averaging nets you a 10% loss.

If you still can't get over your cognitive bias and embrace your pure intellect, you could take a halfway approach and lump sum 50% into equities now, then value average in 4.5% each month.

MotoTrojan
Posts: 2121
Joined: Wed Feb 01, 2017 8:39 pm

Re: Fixed income windfall allocation: lump sum or steadily buy?

Post by MotoTrojan » Sun May 06, 2018 12:59 pm

FinancialDave wrote:
Sat May 05, 2018 12:14 am
MotoTrojan wrote:
Fri May 04, 2018 1:37 pm

As said above, a $1M portfolio made up of 30 years of market returns is today no different than a $1M deposit into your checking account. If you are afraid to lump the new $1M in, you should be equally afraid leaving the 30 year accumulated $1M invested.
That sounds just a little toooo academic for me.

In the first place I hope you aren't saying that a $1M portoflio is the same as having $1M in a checking account as this is something that only works in the classroom and not in real life. In real life say you have $1M of mutual funds at the close of business on Monday. On Tues morning you decide you want that million dollar portfolio in your checking account. You put a sell order in Tues 10 am. You look at your account on Wed morning and find that you only have $750,000 left -- oops, major banking crisis in the middle of the day and your account dropped 25% before it could be sold! Or market was closed for 3 days before your order could be excercised - that never happens :annoyed

Furthermore, investing has to deal with an element of the brain and economics that is called neuroeconomics and sometimes it is not only about the math, but about being able to sleep at night and stay invested.

Only the arrogant would take an individual with no invested money who just inherited $1M and put it all in the market in a single day, without any regard for what happened to be going on at the time in the market. While on paper the odds might look good, there is no excuse for getting hit by a bus crossing the street just because 90% of the time when people cross the street without looking they never get hit!

:oops:
$1M deposited into your money market then; you are countering in an irrelevant aspect.

I never said whether this was the only asset the person had. That does change the emotional aspect of it, but the logic still applies.

In my opinion, only the arrogant would not see the double standard in my analogy.

Post Reply