DCA, Lump sum, or...

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Brownpow121
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DCA, Lump sum, or...

Post by Brownpow121 »

I have a small inheritance in cash. DCA each month. 40 YO so of course plenty of runway ahead. Thoughts on the getting this to work in the environment we are in...?
Actin
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Re: DCA, Lump sum, or...

Post by Actin »

Lump sum is mathematically superior 2/3 of the time, and DCA is superior 1/3 of the time, and that's pretty much based on luck.

I did DCA with an inheritance I received for two years. I eventually upped it to DCA larger amounts and eventually put the entire rest of it in. It's completely fine for someone nervous and new. DCA until you are comfortable.

The market will crash many more times before we retire. Get comfortable with it at your own pace.
YRT70
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Re: DCA, Lump sum, or...

Post by YRT70 »

Vanguard paper: Dollar-cost averaging just means taking risk later
https://static.twentyoverten.com/5980d1 ... nguard.pdf

Ben Felix paper: Lump sum vs. DCA
https://www.pwlcapital.com/wp-content/u ... esting.pdf

Both good reads.
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Stinky
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Re: DCA, Lump sum, or...

Post by Stinky »

Brownpow121 wrote: Wed Sep 09, 2020 10:26 pm I have a small inheritance in cash. DCA each month. 40 YO so of course plenty of runway ahead. Thoughts on the getting this to work in the environment we are in...?
Welcome to the Forum!

By the time you need to draw on the money, you won't be able to track the difference in your results between DCA and lump summing.

The studies say, on average, you'll come out ahead with lump summing. I'd go with the averages, and lump sum your remaining amount right now.
It's a GREAT day to be alive - Travis Tritt
B. Wellington
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Re: DCA, Lump sum, or...

Post by B. Wellington »

Actin wrote: Thu Sep 10, 2020 12:16 am Lump sum is mathematically superior 2/3 of the time, and DCA is superior 1/3 of the time, and that's pretty much based on luck.

I did DCA with an inheritance I received for two years. I eventually upped it to DCA larger amounts and eventually put the entire rest of it in. It's completely fine for someone nervous and new. DCA until you are comfortable.

The market will crash many more times before we retire. Get comfortable with it at your own pace.
+1 Agree. With many years ahead of you before you may need the money it probably won't matter much. The important thing is to find YOUR comfort level to the point where you won't panic during one of those corrections and stay invested.

Welcome to the forum. :beer

B. Wellington
Chicken Little
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Re: DCA, Lump sum, or...

Post by Chicken Little »

Is this a situation where you can take advantage of behavioral finance?

If an investor is genuinely torn between Lump Sum and DCA and selects the latter, aren't they in a choice position, psychologically, to abandon DCA and Lump Sum into a significant downturn?

It wouldn't be a well thought out plan to maximize return, it would be not having the intestinal fortitude to stick with your plan in a positive way?
tbone555
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Re: DCA, Lump sum, or...

Post by tbone555 »

Chicken Little wrote: Thu Sep 10, 2020 6:05 am Is this a situation where you can take advantage of behavioral finance?

If an investor is genuinely torn between Lump Sum and DCA and selects the latter, aren't they in a choice position, psychologically, to abandon DCA and Lump Sum into a significant downturn?

It wouldn't be a well thought out plan to maximize return, it would be not having the intestinal fortitude to stick with your plan in a positive way?

But if markets move sharply higher, they may decide to halt their DCA and wait for the markets to come back down. The phycology can work against you.
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NearlyRetired
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Re: DCA, Lump sum, or...

Post by NearlyRetired »

Stinky wrote: Thu Sep 10, 2020 4:05 am
Brownpow121 wrote: Wed Sep 09, 2020 10:26 pm I have a small inheritance in cash. DCA each month. 40 YO so of course plenty of runway ahead. Thoughts on the getting this to work in the environment we are in...?
Welcome to the Forum!

By the time you need to draw on the money, you won't be able to track the difference in your results between DCA and lump summing.

The studies say, on average, you'll come out ahead with lump summing. I'd go with the averages, and lump sum your remaining amount right now.
So when you are in retirement and withdrawing monies, is it better to take an annual lump sum out or monthly (for e.g.) i.e lump sum or DCA - is it the opposite rule ?
To err is to be human, to really mess up, use a computer
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Watty
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Re: DCA, Lump sum, or...

Post by Watty »

You will get better suggestions if you post your information using this suggested format as a guideline, but you do not need to follow it exactly.

viewtopic.php?f=1&t=6212

A options to add to your list of things to consider;

1) Pay any mortgage off or down. You can then invest your free up mortgage payment each month. If you are not going to pay it off completely then you may want to look into "recasting your mortgage"(Google this).

2) Be sure that you will be maxing out all your retirement accounts. If you are in the 25% tax bracket you may need to do something like increase your 401k payroll withholdings by $1,000 a month then spend $750 a month out of your inheritance for your living expenses. The difference in the amounts is because of the $250 in tax savings.

3) It is just one of my pet peeves but I hate it when people post about having significant money but they are driving an old beater that is not as safe as a newer car. If you are driving an older car consider if you should get a newer one that is much safer. The car safety has improved a lot especially since 2012 and in the last few years they have added a lot of new safety features. You don't need to get an expensive new car with the all the bells and whistles but you may be able to get a reasonably priced car that is a lot safer than what you are driving now.
MotoTrojan
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Re: DCA, Lump sum, or...

Post by MotoTrojan »

Unless you think it’s reasonable to move your 401k/IRA to money market and re-DCA in, then only lump sum makes sense.
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Stinky
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Re: DCA, Lump sum, or...

Post by Stinky »

NearlyRetired wrote: Thu Sep 10, 2020 6:45 am
Stinky wrote: Thu Sep 10, 2020 4:05 am
Brownpow121 wrote: Wed Sep 09, 2020 10:26 pm I have a small inheritance in cash. DCA each month. 40 YO so of course plenty of runway ahead. Thoughts on the getting this to work in the environment we are in...?
Welcome to the Forum!

By the time you need to draw on the money, you won't be able to track the difference in your results between DCA and lump summing.

The studies say, on average, you'll come out ahead with lump summing. I'd go with the averages, and lump sum your remaining amount right now.
So when you are in retirement and withdrawing monies, is it better to take an annual lump sum out or monthly (for e.g.) i.e lump sum or DCA - is it the opposite rule ?
The general logic is that you’re best-served by having your money invested for the longest possible time. That logic is premised on the fact that markets, over time, have gone up.

That’s why the general recommendation is to lump sum invest - get the money invested as soon as possible.

It makes sense that the reverse would be true in a draw down mode. You would want to “DCA”, withdrawing smaller amounts more frequently rather than a large amount at one time.
It's a GREAT day to be alive - Travis Tritt
Chicken Little
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Re: DCA, Lump sum, or...

Post by Chicken Little »

duplicate
Last edited by Chicken Little on Thu Sep 10, 2020 5:13 pm, edited 1 time in total.
Chicken Little
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Re: DCA, Lump sum, or...

Post by Chicken Little »

tbone555 wrote: Thu Sep 10, 2020 6:35 am
Chicken Little wrote: Thu Sep 10, 2020 6:05 am Is this a situation where you can take advantage of behavioral finance?

If an investor is genuinely torn between Lump Sum and DCA and selects the latter, aren't they in a choice position, psychologically, to abandon DCA and Lump Sum into a significant downturn?

It wouldn't be a well thought out plan to maximize return, it would be not having the intestinal fortitude to stick with your plan in a positive way?

But if markets move sharply higher, they may decide to halt their DCA and wait for the markets to come back down. The phycology can work against you.
I’m not sure that’s equivalent.

The prospective investor is going to Lump Sum or DCA. Those are the choices. Either is fine.

If the investor selects DCA, and the market drops 20%, maybe they “capitulate” and Lump Sum the remainder. That’s making two parts of the same original decIsion, both of which were OK to begin with.

What you suggested is deviating from the original plan to invest by either Lump Sum or DCA. That’s not really in the same scope. They could bail at any time for any reason.

What I’m talking about is making a good mistake.

It doesn’t even have to be a mistake. You could write it down on a piece of paper;

“I’m torn between Lump Sum and DCA. I chose DCA for 12 installments, but if the market declines by > 20%, I’ll just lump sum the rest like I almost did anyway”.

If you’re saying that opens a Pandora’s box, I guess I agree in that my estimate is about 50% of investors on here have wildly inappropriate asset allocations, and will readily capitulate at the first true test (not 2000, ‘08, ‘20, they were easy if you didn’t get caught with an expensive house you had to unload or get fired).

Are there really no “good” mistakes?
Chicken Little
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Re: DCA, Lump sum, or...

Post by Chicken Little »

I think you have to be a little introspective, and know your general tendencies. Call it due diligence on yourself.

I generally have a negative bias toward the market that is proportional to government support. I drug my feet on 2019 Roth contribution because I didn’t like the valuations. By making that mistake, the money was available in March.
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bertilak
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Re: DCA, Lump sum, or...

Post by bertilak »

Chicken Little wrote: Thu Sep 10, 2020 10:05 am By making that mistake, the money was available in March.
Sometimes you will be right and sometimes you will be wrong. Sometimes you win and sometimes you lose.

There are odds either way.

Both history and logic say the odds are in favor of lump sum. Misplaying the odds is the mistake; going with the odds and taking the wins and losses as they occur is not a mistake, even when you lose.

If you get a bad roll there will be many rolls over the course of a lifetime of investing. The odds say lump sum will get more good rolls than DCA.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
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JoeRetire
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Re: DCA, Lump sum, or...

Post by JoeRetire »

Brownpow121 wrote: Wed Sep 09, 2020 10:26 pm I have a small inheritance in cash. DCA each month. 40 YO so of course plenty of runway ahead. Thoughts on the getting this to work in the environment we are in...?
Unless it would keep you awake at night, Lump Sum... always Lump Sum.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
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bertilak
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Re: DCA, Lump sum, or...

Post by bertilak »

JoeRetire wrote: Thu Sep 10, 2020 1:04 pm
Brownpow121 wrote: Wed Sep 09, 2020 10:26 pm I have a small inheritance in cash. DCA each month. 40 YO so of course plenty of runway ahead. Thoughts on the getting this to work in the environment we are in...?
Unless it would keep you awake at night, Lump Sum... always Lump Sum.
And if it would keep you awake, change your asset allocation to a less scary level before doing the lump sum investment.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
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bertilak
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Re: DCA, Lump sum, or...

Post by bertilak »

Brownpow121 wrote: Wed Sep 09, 2020 10:26 pm I have a small inheritance in cash. DCA each month. 40 YO so of course plenty of runway ahead. Thoughts on the getting this to work in the environment we are in...?
Whatever environment we are in now may persist past the DCA period, or it may go away and come back in a few months or years. It is safest to assume it is permanent.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
Candor
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Re: DCA, Lump sum, or...

Post by Candor »

If you are really torn and can't decide you could always lump 50% of it and DCA the other 50%.
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Eagle33
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Re: DCA, Lump sum, or...

Post by Eagle33 »

Watty wrote: Thu Sep 10, 2020 7:07 am You will get better suggestions if you post your information using this suggested format as a guideline, but you do not need to follow it exactly.

viewtopic.php?f=1&t=6212

A options to add to your list of things to consider;

1) Pay any mortgage off or down. You can then invest your free up mortgage payment each month. If you are not going to pay it off completely then you may want to look into "recasting your mortgage"(Google this).

2) Be sure that you will be maxing out all your retirement accounts. If you are in the 25% tax bracket you may need to do something like increase your 401k payroll withholdings by $1,000 a month then spend $750 a month out of your inheritance for your living expenses. The difference in the amounts is because of the $250 in tax savings.

3) It is just one of my pet peeves but I hate it when people post about having significant money but they are driving an old beater that is not as safe as a newer car. If you are driving an older car consider if you should get a newer one that is much safer. The car safety has improved a lot especially since 2012 and in the last few years they have added a lot of new safety features. You don't need to get an expensive new car with the all the bells and whistles but you may be able to get a reasonably priced car that is a lot safer than what you are driving now.
+1
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
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