Dollar cost averaging or all at once?

[exante]

Imagine you received a windfall. You have your asset allocation already sorted out (including your EF). Is there any sound basis/logic behind the idea of dollar cost averaging it into your desired AA over the course of a few months versus just deploying all the capital right away? Any clear pros/cons to DCA?

[4MToRetire]

Feel free to search the forum (a lot of discussions about this). It may not be the best but if you are undecided you should invest half of it at once and dca the rest. Time in the market matters so go in as soon as you able to.

[cmr86]

Honestly, there are reasons to do both. Just choose what you're most comfortable with and go with it.

[Johm221122]

Imagine you received a windfall. You have your asset allocation already sorted out (including your EF). Is there any sound basis/logic behind the idea of dollar cost averaging it into your desired AA over the course of a few months versus just deploying all the capital right away? Any clear pros/cons to DCA?

Imagine I received a windfall,then yes I would definitely invest it immediately into what ever asset allocation I would choose with my new total.

But I understand my personal risk tolerance and personal situation and what I'm comfortable with (unfortunately this doesn't mean it will be right decision in hindsight)

[pasadena]

Imagine you received a windfall. You have your asset allocation already sorted out (including your EF). Is there any sound basis/logic behind the idea of dollar cost averaging it into your desired AA over the course of a few months versus just deploying all the capital right away? Any clear pros/cons to DCA?

Imagine I received a windfall,then yes I would definitely invest it immediately into what ever asset allocation I would choose with my new total.

But I understand my personal risk tolerance and personal situation and what I'm comfortable with (unfortunately this doesn't mean it will be right decision in hindsight)

+1

Either decision is mostly psychological - there's no good answer. I'm in the "put it all in now and move on with my life" camp. DCA feels like torturing myself at regular interval for however long it takes to go through the whole thing. I also couldn't avoid going over the plan over and over again until I'm done. No thanks. I'd just put those dollars to work for me and forget about them until I need them.

[enad]

At the very least drop the entire amount into a settlement account which could earn up to 4.7%, then whatever makes you sleep well at night. If you are hesitant to put the entire amount in, then average your way into a position

[seajay]

September 2000 lump in 1M into stock, September 2002 = 559K portfolio value

September 2000 lump in 500K into stock, 500K into cash deposit, End of October 2001 move the cash into stock. September 2002 = 713K portfolio value. 26.5% more shares being held than had you lumped all-in from the start.

Yes all-in at the start tends to average more, but within that average there are extreme individual worst case samples and avoiding being one/the worst by (time) diversifying is a reasonable choice. The difference in longer term outcomes can be significantly different when you shift the start date by a year.

[muffins14]

It just depends how you feel about market timing

Lump sum is expected to be better, so that’s the mathematical answer in the absence of special information about the market

For timing: will you feel worse if the market drops after you invest than how bad you would feel if you missed a 10-20% gain?

That can determine your path. If it were me, and this was like a 1M windfall, I’d probably invest half immediately and half via biweekly investments over 3 months

[burritoLover]

September 2000 lump in 1M into stock, September 2002 = 559K portfolio value

September 2000 lump in 500K into stock, 500K into cash deposit, End of October 2001 move the cash into stock. September 2002 = 713K portfolio value. 26.5% more shares being held than had you lumped all-in from the start.

Yes all-in at the start tends to average more, but within that average there are extreme individual worst case samples and avoiding being one/the worst by (time) diversifying is a reasonable choice. The difference in longer term outcomes can be significantly different when you shift the start date by a year.

Or you lump sum half in Sept 1998 and then the other half in Sept 1999 (after its gone up 32%), then the market crashes in 2000 and you are worse off. Or you lump sum half in Sept 2012 and then you are waiting for a bad period to invest the other half but it doesn't come until 2018 and you lost out on 15% returns per year for 6 years.

[rkhusky]

If you expect the market to go up, invest all at once.

If you don’t expect the market to go up, why do you invest in stocks?

[Calvert]

Any clear pros/cons to DCA?

Digging into DCA vs LumpSum reveals a core "fact" about FixedIncome vs Equity investing.
Equity can have significant gains and losses ... giving a wide range of outcomes.
"On average", Equity returns are usually higher than FI.

Generally, DCA means having more in (Short term) FixedIncome for a longer time.
Generally, LumpSum means having more in Equity for a longer time.

Because DCA will likely be over a short period of time ... random luck is a significant factor in a single DCA exercise.
Over many DCA exercises, LumpSum wins (about 2/3s of the time for about 3.5% more ... IIRC)


PS:
Most of this is already covered in the other posts. I was just seeing if I could clearly voice my own opinion
I did try to simplify "FixedIncome" as words about term and duration would confuse this case where the DCA funds should certainly be in a ~4.5% yielding MM.

[simpleisbest]

Either decision is mostly psychological - there's no good answer. I'm in the "put it all in now and move on with my life" camp. DCA feels like torturing myself at regular interval for however long it takes to go through the whole thing. I also couldn't avoid going over the plan over and over again until I'm done. No thanks. I'd just put those dollars to work for me and forget about them until I need them.

On the contrary, going over the plan over and over again is how you validate your plan. DCA gives you the opportunity to check yourself and reconsider your strategy. I'm in favor of taking my time to make big decisions. Investing a lump sum all at once seems impulsive and locks you in without the chance to reconsider.

[burritoLover]

Either decision is mostly psychological - there's no good answer. I'm in the "put it all in now and move on with my life" camp. DCA feels like torturing myself at regular interval for however long it takes to go through the whole thing. I also couldn't avoid going over the plan over and over again until I'm done. No thanks. I'd just put those dollars to work for me and forget about them until I need them.

On the contrary, going over the plan over and over again is how you validate your plan. DCA gives you the opportunity to check yourself and reconsider your strategy. I'm in favor of taking my time to make big decisions. Investing a lump sum all at once seems impulsive and locks you in without the chance to reconsider.

If you are constantly re-evaluating your investment strategy, you are likely doing more harm than good.

[seajay]

September 2000 lump in 1M into stock, September 2002 = 559K portfolio value

September 2000 lump in 500K into stock, 500K into cash deposit, End of October 2001 move the cash into stock. September 2002 = 713K portfolio value. 26.5% more shares being held than had you lumped all-in from the start.

Yes all-in at the start tends to average more, but within that average there are extreme individual worst case samples and avoiding being one/the worst by (time) diversifying is a reasonable choice. The difference in longer term outcomes can be significantly different when you shift the start date by a year.

Or you lump sum half in Sept 1998 and then the other half in Sept 1999 (after its gone up 32%), then the market crashes in 2000 and you are worse off. Or you lump sum half in Sept 2012 and then you are waiting for a bad period to invest the other half but it doesn't come until 2018 and you lost out on 15% returns per year for 6 years.

But you avoid the worst case, at the expense of a lower average case outcome, but where the average is more usually more than enough, in contrast to the worst case being more critical. No one achieves the average, but are individual samples around that. Reducing the risk of being the exceptional worst case is a key factor for some.

[simpleisbest]

Either decision is mostly psychological - there's no good answer. I'm in the "put it all in now and move on with my life" camp. DCA feels like torturing myself at regular interval for however long it takes to go through the whole thing. I also couldn't avoid going over the plan over and over again until I'm done. No thanks. I'd just put those dollars to work for me and forget about them until I need them.

On the contrary, going over the plan over and over again is how you validate your plan. DCA gives you the opportunity to check yourself and reconsider your strategy. I'm in favor of taking my time to make big decisions. Investing a lump sum all at once seems impulsive and locks you in without the chance to reconsider.

If you are constantly re-evaluating your investment strategy, you are likely doing more harm than good.

I vehemently disagree. If you just set your investment strategy once and never think about it or revisit, how do you know you took into account all possible information? Have the first decisions you ever made in your life always been perfect on the first try? Why would you want the rest of your life to be determined by the decisions of an 18-year-old?

[burritoLover]

September 2000 lump in 1M into stock, September 2002 = 559K portfolio value

September 2000 lump in 500K into stock, 500K into cash deposit, End of October 2001 move the cash into stock. September 2002 = 713K portfolio value. 26.5% more shares being held than had you lumped all-in from the start.

Yes all-in at the start tends to average more, but within that average there are extreme individual worst case samples and avoiding being one/the worst by (time) diversifying is a reasonable choice. The difference in longer term outcomes can be significantly different when you shift the start date by a year.

Or you lump sum half in Sept 1998 and then the other half in Sept 1999 (after its gone up 32%), then the market crashes in 2000 and you are worse off. Or you lump sum half in Sept 2012 and then you are waiting for a bad period to invest the other half but it doesn't come until 2018 and you lost out on 15% returns per year for 6 years.

But you avoid the worst case, at the expense of a lower average case outcome, but where the average is more usually more than enough, in contrast to the worst case being more critical. No one achieves the average, but are individual samples around that. Reducing the risk of being the exceptional worst case is a key factor for some.

That is why you reduce the risk of your entire portfolio by your investment choices so it fits with your tolerance and goals. It makes no sense to arbitrarily treat this new money as "special" and then say, oh well, I don't care if the rest of the portfolio that is already invested drops by this severe amount.

[burritoLover]

Either decision is mostly psychological - there's no good answer. I'm in the "put it all in now and move on with my life" camp. DCA feels like torturing myself at regular interval for however long it takes to go through the whole thing. I also couldn't avoid going over the plan over and over again until I'm done. No thanks. I'd just put those dollars to work for me and forget about them until I need them.

On the contrary, going over the plan over and over again is how you validate your plan. DCA gives you the opportunity to check yourself and reconsider your strategy. I'm in favor of taking my time to make big decisions. Investing a lump sum all at once seems impulsive and locks you in without the chance to reconsider.

If you are constantly re-evaluating your investment strategy, you are likely doing more harm than good.

I vehemently disagree. If you just set your investment strategy once and never think about it or revisit, how do you know you took into account all possible information? Have the first decisions you ever made in your life always been perfect on the first try? Why would you want the rest of your life to be determined by the decisions of an 18-year-old?

The money someone is DCAing has no special significance over the money that is already invested. The point was made that DCAing is better than lump sum so you can evaluate your strategy as you DCA. You don't DCA over 10 years - it is typically short periods. That, to me, sounds primarily like market timing not long-term strategy changes.

[alluringreality]

Realistically any windfall for us would affect our intended allocation. I tend to agree with the concept of Knightian uncertainty, so in some respects I consider the future generally unknown, especially when considering one single point in time. I don't exactly follow why someone would consider it imperative to invest a windfall immediately, but I tend to double-check various classical finance concepts for practical personal implications.

Since I currently make periodic investments, essentially I tend to consider dollar cost averaging possibly in line with limited-term insurance for unexpected events, like discussed here.
http://www.efficientfrontier.com/ef/997/dca.htm

My behavioral finance inclinations fail to consider it necessary to borrow to make tomorrow's purchases today, so in line with how I currently make periodic investments, I'm okay if someone with assets to invest might prefer to buy at more than one point in time.
http://economics-files.pomona.edu/GaryS ... rs/DCA.pdf

[wolf359]

Imagine you received a windfall. You have your asset allocation already sorted out (including your EF). Is there any sound basis/logic behind the idea of dollar cost averaging it into your desired AA over the course of a few months versus just deploying all the capital right away? Any clear pros/cons to DCA?

Imagine I received a windfall,then yes I would definitely invest it immediately into what ever asset allocation I would choose with my new total.

But I understand my personal risk tolerance and personal situation and what I'm comfortable with (unfortunately this doesn't mean it will be right decision in hindsight)

+1

Either decision is mostly psychological - there's no good answer. I'm in the "put it all in now and move on with my life" camp. DCA feels like torturing myself at regular interval for however long it takes to go through the whole thing. I also couldn't avoid going over the plan over and over again until I'm done. No thanks. I'd just put those dollars to work for me and forget about them until I need them.

I agree that it's mostly psychological. But another point of view is that the windfall just added to your portfolio in the cash asset. Your asset allocation is out of whack. Don't think of it as adding money to the market but rather as a rebalancing opportunity.

If you are not comfortable with the market falling with your current level of exposure, then the problem is that you have the wrong asset allocation for your risk tolerance. And yes, getting a windfall can change your risk tolerance (in either direction.) So re-evaluate your risk tolerance, and then rebalance.

[Calvert]

On the contrary, going over the plan over and over again is how you validate your plan. DCA gives you the opportunity to check yourself and reconsider your strategy. I'm in favor of taking my time to make big decisions. Investing a lump sum all at once seems impulsive and locks you in without the chance to reconsider.

If you are constantly re-evaluating your investment strategy, you are likely doing more harm than good.

I vehemently disagree. If you just set your investment strategy once and never think about it or revisit, how do you know you took into account all possible information? Have the first decisions you ever made in your life always been perfect on the first try? Why would you want the rest of your life to be determined by the decisions of an 18-year-old?

While I totally agree that reviewing and "thinking about" plans and strategy makes sense ... actually taking action on those thoughts can be a losing game.

Bad decisions do not equate to bad outcomes.
Good decisions sometimes result in in bad outcomes.
When a significant amount of random luck is involved, separating skill from luck is very hard.

There is an adage: "An investment portfolio is like a bar of soap: The more you touch/handle it, the smaller it gets.”

On DCA vs Lump Sum ... the kind folks at Vanguard Say: "Our research indicates that it's prudent to invest a lump sum immediately."
https://investor.vanguard.com/investor- ... s-lump-sum

[burritoLover]

Realistically any windfall for us would affect our intended allocation. I tend to agree with the concept of Knightian uncertainty, so in some respects I consider the future generally unknown, especially when considering one single point in time. I don't exactly follow why someone would consider it imperative to invest a windfall immediately, but I tend to double-check various classical finance concepts for practical personal implications.

Since I currently make periodic investments, essentially I tend to consider dollar cost averaging possibly in line with limited-term insurance for unexpected events, like discussed here.
http://www.efficientfrontier.com/ef/997/dca.htm

My behavioral finance inclinations fail to consider it necessary to borrow to make tomorrow's purchases today, so in line with how I currently make periodic investments, I'm okay if someone with assets to invest might prefer to buy at more than one point in time.
http://economics-files.pomona.edu/GaryS ... rs/DCA.pdf

So, let's say at age 18 (knowing what you know now), someone hands you $2 mil - you would DCA it over 50 years to duplicate periodic investments?

[pasadena]

Either decision is mostly psychological - there's no good answer. I'm in the "put it all in now and move on with my life" camp. DCA feels like torturing myself at regular interval for however long it takes to go through the whole thing. I also couldn't avoid going over the plan over and over again until I'm done. No thanks. I'd just put those dollars to work for me and forget about them until I need them.

On the contrary, going over the plan over and over again is how you validate your plan. DCA gives you the opportunity to check yourself and reconsider your strategy. I'm in favor of taking my time to make big decisions. Investing a lump sum all at once seems impulsive and locks you in without the chance to reconsider.

If you are constantly re-evaluating your investment strategy, you are likely doing more harm than good.

I vehemently disagree. If you just set your investment strategy once and never think about it or revisit, how do you know you took into account all possible information? Have the first decisions you ever made in your life always been perfect on the first try? Why would you want the rest of your life to be determined by the decisions of an 18-year-old?

That is why you reduce the risk of your entire portfolio by your investment choices so it fits with your tolerance and goals. It makes no sense to arbitrarily treat this new money as "special" and then say, oh well, I don't care if the rest of the portfolio that is already invested drops by this severe amount.

I didn't mean reevaluating my entire strategy, but whatever it is I decide to do with the windfall. The end result might be changing my overall strategy the wrong way, because I'd be operating on emotions every single time a chunk of that money is getting invested.

My strategy already exists - I have an AA, I have an IPS, and those have been in place for a long time (and long after I was 18 years old). As burritoLover says, the windfall money is nothing special, so it goes where the other $ go. Obviously, depending on the size of it, it may require reevaluating the overall strategy first. That's fine. Still, once that's done, then it gets applied, and I move on with my life.

I don't know, at any point of time, is today is more like September 2000, or March 2009. So I won't be trying to guess and give myself headaches over months.

This discussion is exactly why I said that there's no good answer between the two. Someone else might operate a different way than I do.

[pasadena]

Imagine you received a windfall. You have your asset allocation already sorted out (including your EF). Is there any sound basis/logic behind the idea of dollar cost averaging it into your desired AA over the course of a few months versus just deploying all the capital right away? Any clear pros/cons to DCA?

Imagine I received a windfall,then yes I would definitely invest it immediately into what ever asset allocation I would choose with my new total.

But I understand my personal risk tolerance and personal situation and what I'm comfortable with (unfortunately this doesn't mean it will be right decision in hindsight)

+1

Either decision is mostly psychological - there's no good answer. I'm in the "put it all in now and move on with my life" camp. DCA feels like torturing myself at regular interval for however long it takes to go through the whole thing. I also couldn't avoid going over the plan over and over again until I'm done. No thanks. I'd just put those dollars to work for me and forget about them until I need them.

I agree that it's mostly psychological. But another point of view is that the windfall just added to your portfolio in the cash asset. Your asset allocation is out of whack. Don't think of it as adding money to the market but rather as a rebalancing opportunity.

If you are not comfortable with the market falling with your current level of exposure, then the problem is that you have the wrong asset allocation for your risk tolerance. And yes, getting a windfall can change your risk tolerance (in either direction.) So re-evaluate your risk tolerance, and then rebalance.

Agreed. It may warrant reviewing your AA, if it changes the overall amount by a lot, enough to move your goals. But that should happen before yo do anything with it (as stated in the wiki). The bigger the windfall, the longer you should think about your strategy before you act. The key here is that you should think about your overall strategy (and AA), not just the new money.

[alluringreality]

So, let's say at age 18 (knowing what you know now), someone hands you $2 mil - you would DCA it over 50 years to duplicate periodic investments?

I'm not sure why someone would necessarily come to such a conclusion from the linked discussion. Usually dollar cost averaging is discussed with an intent for the periodic investment to be limited to a few years at most. Personally I would not consider any longer period, and I would tend to remain in line with the stance of various authors that are willing to entertain possibly choosing a limited time for periodically investing a windfall, including Jack Bogle.

[burritoLover]

So, let's say at age 18 (knowing what you know now), someone hands you $2 mil - you would DCA it over 50 years to duplicate periodic investments?

I'm not sure why someone would necessarily come to such a conclusion from the linked discussion. Usually dollar cost averaging is discussed with an intent for the periodic investment to be limited to a few years at most. Personally I would not consider any longer period, and I would tend to remain in line with the stance of various authors that are willing to entertain possibly choosing a limited time for periodically investing a windfall, including Jack Bogle.

So, a $10k lump sum should be DCA-ed over the same time period as $100k or $500k or $1 mil? Obviously, the larger amount represents a greater risk to the portfolio if something happens - shouldn't it have a longer DCA time frame? Why limit it to a few years if your windfall represented your entire retirement goal at once?

[alluringreality]

So, a $10k lump sum should be DCA-ed over the same time period as $100k or $500k or $1 mil? Obviously, the larger amount represents a greater risk to the portfolio if something happens - shouldn't it have a longer DCA time frame? Why limit it to a few years if your windfall represented your entire retirement goal at once?

Within a dollar cost averaging windfall discussion, my primary thought surrounds investing significant portions of potential lifetime wealth. My last response was intended to essentially answer in opposition to all these lines of questioning. I presume you are intending to make a preconceived point. How does this line of questioning relate to the initially linked perspectives?

[iudiehard1]

Timing the market is always a bad idea but if it were me (and I am doing this now with a smaller lump sum), I am buying into an expected recessionary market. I'm buying over the next 6 months in 1/6 increments. Is it a good idea? Who knows.....its my plan and HELL....its a plan atleast.

[burritoLover]

So, a $10k lump sum should be DCA-ed over the same time period as $100k or $500k or $1 mil? Obviously, the larger amount represents a greater risk to the portfolio if something happens - shouldn't it have a longer DCA time frame? Why limit it to a few years if your windfall represented your entire retirement goal at once?

Within a dollar cost averaging windfall discussion, my primary thought surrounds investing significant portions of potential lifetime wealth. My last response was intended to essentially answer in opposition to the first and last question. I presume you are intending to make a preconceived point. How does this line of questioning relate to the initially linked perspectives?

The last link doesn't work for me so I can't comment. But this idea that DCAing a lump sum you receive makes sense because you already do this via periodic investments doesn't compute. We periodically invest because we don't have the money to invest in the retirement portfolio all at once - we can't decide to invest more than we have (barring leverage). If you received all the money you need for retirement at once, would DCAing that money into the market also make sense?

[alluringreality]

We periodically invest because we don't have the money to invest in the retirement portfolio all at once - we can't decide to invest more than we have (barring leverage). If you received all the money you need for retirement at once, would DCAing that money into the market also make sense?

I do have access to some level of potential leverage, so I'm not necessarily restricted to periodic investment. That can simply be ignored, since I'm not willing to borrow up to the sorts of percentages that would register as a personal windfall. Basically I consider the answer to the last question as including an element of personal choice, along the lines of the links.

[burritoLover]

We periodically invest because we don't have the money to invest in the retirement portfolio all at once - we can't decide to invest more than we have (barring leverage). If you received all the money you need for retirement at once, would DCAing that money into the market also make sense?

I do have access to some level of potential leverage, so I'm not necessarily restricted to periodic investment. That can simply be ignored, since I'm not willing to borrow up to the sorts of percentages that would register as a personal windfall. Basically I consider the answer to the last question as including an element of personal choice, along the lines of the links.

That is an odd perspective - if you have all the money you need for your retirement goal, DCA also means the possibility of buying into a market that is more expensive, therefore, you risk not having enough money for your retirement goals. Of course, the market could also drop but the portfolio already has to be de-risked for retirement for that possibility so it makes no sense to DCA in that scenario. Nor does it during accumulation which also has certain goals you are trying to hit and also the portfolio carries a certain amount of risk given time to retirement/etc and tolerance.

[alluringreality]

That is an odd perspective - if you have all the money you need for your retirement goal, DCA also means the possibility of buying into a market that is more expensive, therefore, you risk not having enough money for your retirement goals. Of course, the market could also drop but the portfolio already has to be de-risked for retirement for that possibility so it makes no sense to DCA in that scenario. Nor does it during accumulation which also has certain goals you are trying to hit and also the portfolio carries a certain amount of risk given time to retirement/etc and tolerance.

My best guess is that you simply consider William Bernstein's Uncle Fred discussion as clearly preferring the immediate lifetime investment option, regardless if someone might end up remorseful after the fact. The initial post in this thread seems to suggest someone has a predetermined allocation and receives a windfall. Like I said, our allocation would probably change with a windfall. Even if we somehow had the fortune of a Vegas windfall, I'm not sure I'd be inclined to necessarily encourage immediately making new decisions, but realistically it's something we'll never need to deal with. The only way that we could reasonably receive a considerable amount of money is through inheritance, and I would personally not consider it necessary to quickly decide upon a new plan in that situation. It seems you have a clear preference here, which likely varies from my general tendency. Bogle seemed to discuss both sides of the immediate or periodic investment decision, for example here he labels dollar cost averaging as not a particularly productive idea.
https://www.youtube.com/watch?v=Oa8MqIcMAfM

[tadamsmar]

Imagine you received a windfall. You have your asset allocation already sorted out (including your EF). Is there any sound basis/logic behind the idea of dollar cost averaging it into your desired AA over the course of a few months versus just deploying all the capital right away? Any clear pros/cons to DCA?

One con is that your DCA option is self-contradictory.

You have a desired AA.

The moment you get the windfall, you are no longer at your desired AA.

So, if you delay investing the windfall you desire a different AA for a few months.

Therefore your desired AA is not your desired AA.

Your option to DCA has a contradiction.

You either give up DCA are give up the notion that your asset allocation is sorted out.

Edit: But your asset allocation is based (in part) on your resources and goals. If a windfall increases your resources then you might want to move to a different location on the EF.

But then the question is "Why don't you change your asset allocation immediately?"

I don't think there is an rational answer for that question, there is no reason to DCA on a schedule over several months and thereby keep changing your asset allocation.

It might take some time to figure out what your new asset allocation should be, but there is still no reason to DCA on a fixed schedule over a period of months.

[bertilak]

Let's say your windfall is about the same size of your current nest egg, perhaps $100,000.

Presumably your current nest egg is invested at an AA you are comfortable with. If not, why not?

When you get that windfall, is there a reason you would not invest it at the current AA? If so, why does that reason not apply to your current nest egg?

A valid reason: The addition of that windfall might make a big enough difference in the size of your nest egg to justify reconsidering its AA. If that does result in a changed AA, invest the new money in a way to achieve that new AA.

Considering Dollar Cost Averaging (DCA): Would that newly-considered AA vary during the time period of a proposed DCA plan? If so, should you stop to reconsider before taking any action? A varying AA is just another way of describing DCA, a gradual decreasing allocation to cash, perhaps. Why would that only apply to the windfall and not to the whole nest egg?

Would a different size-comparison between pre- and post- nest egg sizes change the nature of any of the above considerations?

[deltaneutral83]

September 2000 lump in 1M into stock, September 2002 = 559K portfolio value

September 2000 lump in 500K into stock, 500K into cash deposit, End of October 2001 move the cash into stock. September 2002 = 713K portfolio value. 26.5% more shares being held than had you lumped all-in from the start.

Yes all-in at the start tends to average more, but within that average there are extreme individual worst case samples and avoiding being one/the worst by (time) diversifying is a reasonable choice. The difference in longer term outcomes can be significantly different when you shift the start date by a year.

Or you lump sum half in Sept 1998 and then the other half in Sept 1999 (after its gone up 32%), then the market crashes in 2000 and you are worse off. Or you lump sum half in Sept 2012 and then you are waiting for a bad period to invest the other half but it doesn't come until 2018 and you lost out on 15% returns per year for 6 years.

Yep. The lump sum works about 66%of the time. Right now, we are below the highs, and by a large margin when you bake in the inflation the past 24 months. The odds of a lump sum working out vs DCA are well above 66% currently I'd have to think? I know what I'd be doing. But if watching a "new to you" large bag of cash getting a 10-20% haircut causes you mental anguish, then DCA. The way we humans perceive new money vs old money is quite interesting. The effect on our bottom line is still the same, but we will let our "old" money ride the roller coaster but wan't to protect our "new" money.

[martincmartin]

Imagine three scenarios:

1. You get a $1M windfall. You're trying to decide whether or not to put it all in investments right away, or start with it all in cash and move it to investments over some period of time.
2. You have $1M because you've been saving a little from each paycheck over 30 years. You're wondering whether you should keep it all invested, or move all of it to cash right now, then move it back into investments over time.
3. You have $1M windfall, because you inherited someone else's investments, so they're already invested. Should you keep them invested, or move the money to all cash, then slowly put them back into investments over some period of time.

In Scenario 2, most people would say of course you should keep it invested. The difference between 2. and 3. is just whose name the investments were in. The dynamics of the market are exactly the same in the two cases.

Why would Scenario 1 be any different?

[AspirationalBH]

What works for me is to not be too exact about it. Even after reading the Efficient Frontier and Vanguard papers linked above, I realized it is an emotional decision. If it's lump-sum, I'll procrastinate too long and never get it done. If it's strict scheduled DCA, I feel like I'm making car payments.

My happy medium is to use an allocation plan and buy in 3 parts allowing for some variance:
40% of the total to start, 50% of the remainder, then the net with top-offs/changes allowed

Scheduling 3 buys in a 3-6 month window gives you time to adjust the plan if you have second thoughts. I'm using this strategy now to do some major rebalancing which requires pushing some funds into a taxable account. I don't feel locked-in and it lessens the fears around market timing. I often end up needing less than 3 months since I keep hearing the mantra "time in the market" in my head.

YMMV. In the check-writing days I would round _up_ my utility and credit card bills to multiples of $5 or $25 just so I could balance my checkbook by eye-balling (lazy and penny foolish). Maybe I'll name it "Tennis DCA" as in "40, 30, net" since we volley DCA vs lump-sum so much.

[bertilak]

Many of these DCA discussions assume moving assets from (near) zero risk, AKA cash, to a high-risk investments.

That is the WRONG point of view. WHAT should be considered is moving from INAPPROPRIATE risk (usually all cash) to APPROPRIATE risk. One should NOT leave or place assets in investments with INAPPROPRIATE risk, even temporarily. If one's AA has inappropriate risk then one should change the AA, not step into (or out of) it one toe at a time. Being at an inappropriate risk level is inappropriate no matter how slowly (or quickly) you got there.

[seajay]

Yep. The lump sum works about 66%of the time. Right now, we are below the highs, and by a large margin when you bake in the inflation the past 24 months. The odds of a lump sum working out vs DCA are well above 66% currently I'd have to think? I know what I'd be doing. But if watching a "new to you" large bag of cash getting a 10-20% haircut causes you mental anguish, then DCA. The way we humans perceive new money vs old money is quite interesting. The effect on our bottom line is still the same, but we will let our "old" money ride the roller coaster but wan't to protect our "new" money.

S&P500 since 1985, monthly granularity. Half in at the start, with the other half look to buy at a 5% discount to that price. If at year end that hadn't triggered then lump the other half in at the year end closing price. In 60% of cases you ended up having bought in at a lower price than having lumped all-in at the start. Median across all samples 0.975, average 0.993.

For some, a minority, lumping in did so at a better average price, delaying in the worst of cases ended up having paid around 8% more



Those figures exclude dividend/cash interest/costs. Generally cash interest tends to be > stock dividends so some additional benefit tendency there on top, but where costs are 2 purchase trades rather than one.

1985 onwards was a historically relatively good time for stocks, more broadly the figures might swing even more in favor of not having lumped all-in at the start.

[AnnetteLouisan]

I think avoiding the football-pulled-away from Charlie Brown “auuuuggghhh!” if you invest right before a huge market drop is a sound basis for dividing it into 4 parts and investing one quarter of it over every 6 months.

You may not make more money that way but you will avoid acute emotional distress. Of course the market may also jump right after you decide not to lump sum but that’s not as bad (to me).

[doobiedoo]

Studies show that lump sum is best on average.
But you are just one data point and are not the average.
There is always a chance of a big market drop soon after your lump sum investment.
Dollar cost averaging (DCA) is maybe not optimal, but it has less risk.

I actually did receive a windfall (inheritance) in 2012.
I chose to invest it over a 6-month period. (not quite in equal amounts or equal sums, but close enough to DCA.)

[seajay]

Studies show that lump sum is best on average.
But you are just one data point and are not the average.

Most investors expect the average only to find their own outcome is mediocre (median).

https://www.macrotrends.net/1319/dow-jo ... ical-chart sources Dow open, year low, close prices from 1915

With data arranged to have Open prices in column B, low in C, close in D for each row (year)

=IF(C7<B7*0.95,AVERAGE(B7,B7*0.95),AVERAGE(B7,D7))

i.e. test whether the year low was lower than 5% below the open price and if so count your cost of stock as being the average of the year open and 95% of the year open price ... otherwise count your cost as the average of the year open and year close prices.

For each of those calculate that price / year open price .... and then calculate the median of all of those = 0.975. i.e. most investors would have achieved the median, not the average. The average has skewedness/kurtois, a few great cases distorts the average.

Of 109 samples, 65 (59.6%) would have been better using the above method over that of lumping all-in at the start.

But where for some, a minority, the difference of all-in at the start was considerably better than the above



Median = 0.975
Average = 1.02544

That excludes costs/dividends/cash deposit interest. It's not unreasonable to assume those are largely insignificant i.e. stock dividends = cash interest and the costs of 2 trades instead of one being insignificant in the scale of things.

Of the start years that were better to have lumped in at the start, ignoring the other years, the current incomplete year is still running as though it would have been better to have lumped in at the start of the year, but where obviously that might not be the case by the end of year.

[bikeeagle1]

I'm in the average-in or DCA camp, but I would spread it out longer than just a few months. Here's why:

Scenario 1:
We have a recession in the next year or two, and a corresponding drop of (say) 50% in the stock indexes. What do you do?

You buy during that drop and brag about being a genius market timer. You are happy to have missed some of the drop with your new funds. If you go this route, remember that you can't time the bottom. Just follow a plan of buying a certain amount at certain points in the drawdown (buy with 20% of the funds every 5 or 10% drawdown in the SPX, for example).

Scenario 2:
We never see the recession, the market continues on up, and you wish you had bought now. What do you do?

You are earning around 5% in your MM fund while you wait, so you are roughly keeping up with inflation. At some point, if rates drop to the point where that is no longer the case, invest then. The same logic for investing it all now will still apply.

If it were me, I would combine the above with a partial lump sum investment, since no one knows the future for sure. Invest half now, and the other half accounting for scenarios 1 & 2 above. That way you feel (at least partially) right about your results, whichever way the markets go.

[Wanderingwheelz]

I would ALWAYS dollar cost average a significant lump sum into equities, by doing half right away and taking no more than 12 months for the rest. I’d very loosely define “significant” as something like more than $250,000 *or* 25% of your total net worth as long as it’s more than $25,000. This would be simply to avoid the mental anguish of missing an extreme decline or advance. (But the old saw “stocks take the stairs on the way up and the elevator on the way down” rings true for me.)

[Tom_T]

I'm in the average-in or DCA camp, but I would spread it out longer than just a few months. Here's why:

Scenario 1:
We have a recession in the next year or two, and a corresponding drop of (say) 50% in the stock indexes. What do you do?

You buy during that drop and brag about being a genius market timer. You are happy to have missed some of the drop with your new funds. If you go this route, remember that you can't time the bottom. Just follow a plan of buying a certain amount at certain points in the drawdown (buy with 20% of the funds every 5 or 10% drawdown in the SPX, for example).

Scenario 2:
We never see the recession, the market continues on up, and you wish you had bought now. What do you do?

You are earning around 5% in your MM fund while you wait, so you are roughly keeping up with inflation. At some point, if rates drop to the point where that is no longer the case, invest then. The same logic for investing it all now will still apply.

If it were me, I would combine the above with a partial lump sum investment, since no one knows the future for sure. Invest half now, and the other half accounting for scenarios 1 & 2 above. That way you feel (at least partially) right about your results, whichever way the markets go.

Except that if there's a recession, the Fed could quickly cut rates, and suddenly your MM fund is paying 3% or less, instead of 5%.

Bottom line: there is no way to know in advance which method results in the highest amount. Best one can do is pick a method with the understanding of the tradeoffs, and live with it. Over a long investing timeline, it's not going to matter all that much. The goal is to be invested at some point "soon", and then let it work.

[seajay]

I would ALWAYS dollar cost average a significant lump sum into equities, by doing half right away and taking no more than 12 months for the rest. I’d very loosely define “significant” as something like more than $250,000 *or* 25% of your total net worth as long as it’s more than $25,000. This would be simply to avoid the mental anguish of missing an extreme decline or advance. (But the old saw “stocks take the stairs on the way up and the elevator on the way down” rings true for me.)

Buy and hold is no different to cost-less daily lumping in, each and every day

How to address that? By measuring all of the cases and figuring out the average amount of stock/cash weightings and target holding that average weighting of stock/cash. Perhaps modified to shift some of the stock risk over to the bond side. If 60% of cases triggered a 5% dip purchase, on average halfway through the year then ( 0.6 * 75% ) + ( 0.4 * 100 ) = 85% average stock, so 15% average cash. Swapping out the cash for bonds along with shifting some of stock risk over to the bond side, 85/15 stock/cash -> 67/33 TSM/TBM

[bikeeagle1]

Except that if there's a recession, the Fed could quickly cut rates, and suddenly your MM fund is paying 3% or less, instead of 5%.

Bottom line: there is no way to know in advance which method results in the highest amount. Best one can do is pick a method with the understanding of the tradeoffs, and live with it. Over a long investing timeline, it's not going to matter all that much. The goal is to be invested at some point "soon", and then let it work.

Exactly why I suggested investing when MM fund rates no longer make sense. Also, my comment was not designed to achieve "the highest amount," but rather to AVOID achieving the LOWEST amount.

Of course, it also depends on your age and time horizon. I am nearing retirement, so my psychological perspective is based on that.

[LeslieSmiley]

Statistically speaking, lump sum should yield a higher return in the long run.

psychologically speaking, DCA is preferred by those who react negatively if market drops shortly after they lump sum into the market, though rationally that drop is likely to be temporarily and that same amount of money will eventually ride it back up and continue to grow in the future.

On the other hand, DCA is not preferred by those who find the process of DCA to be a hassle and if the market continues to shoot up, a regret would be felt and realized as the majority of the intended inverted money is still on the side line.

So assess your own psychological/emotional stance and choose accordingly.

I am a lump sum person as I feel DCA causes a constant "hanging over my head" feeling and I contribute it as a "fear based" attitude which I personally don't subscribe to. I am talking about myself personally so please refrain from showing me that DCA is superior and that it's not "fear based" and etc because I am not claiming that for the others, just myself.

[seajay]

Statistically speaking, lump sum should yield a higher return in the long run.

Mathematically my earlier model has 60% having bought into stock at a 2.5% discount, such that statistically lumping in yielded a lower long run return for the average (median) investor.

The optionality of cash tends to be overlooked. If I start with thirds each stock/gold/cash, just 33% stock weighting, but have deployed all of the gold/cash into stocks over the first 10 years, buying the dips, perhaps directed by the likes of Robert Lichello's AIM where each time that signals a buy you up the stock weighting (ignore AIM sell signals), and invest for a total of 30 years, then in the first decade I might have averaged 67% stock, and remain at 100% for the next two decades, overall 89% stock on average held over the 30 years. A near Buffett 90/10 where you average into stocks over a period of time type choice (he also suggests that 100% stock is fine for those for whom their kids have flown the nest, they have no debt etc.). Where much of earlier years bad sequence of returns risk was significantly reduced. That might on average compare in total return to that of 90/10 constant weighted, but with lower risk in bad sequence of returns risk having been reduced/eliminated.

[seajay]

Ah! I see the flaw in my logic! If you start with 10% stock in the first year, increase that by 10%/year to end up at 100% in stock at the start of the tenth year, then over 30 years you average 85% stock weighting. What I overlooked was time-in-the-market. That has lower time-in-the-market than constant 85/15, around 14% less. There's a cost to reducing earlier bad-sequence-of-returns risk.

[LeslieSmiley]

Statistically speaking, lump sum should yield a higher return in the long run.

Mathematically my earlier model has 60% having bought into stock at a 2.5% discount, such that statistically lumping in yielded a lower long run return for the average (median) investor.

The optionality of cash tends to be overlooked. If I start with thirds each stock/gold/cash, just 33% stock weighting, but have deployed all of the gold/cash into stocks over the first 10 years, buying the dips, perhaps directed by the likes of Robert Lichello's AIM where each time that signals a buy you up the stock weighting (ignore AIM sell signals), and invest for a total of 30 years, then in the first decade I might have averaged 67% stock, and remain at 100% for the next two decades, overall 89% stock on average held over the 30 years. A near Buffett 90/10 where you average into stocks over a period of time type choice (he also suggests that 100% stock is fine for those for whom their kids have flown the nest, they have no debt etc.). Where much of earlier years bad sequence of returns risk was significantly reduced. That might on average compare in total return to that of 90/10 constant weighted, but with lower risk in bad sequence of returns risk having been reduced/eliminated.

Optionality of the cash is too much of a variable so I was referring to the cash just sitting on the side line.

One could argue that DCA enables you to invest the cash in art and that art ends up being a highly collectible asset which then auctioned off with a huge premium. So in such case, DCA will be superior to lump summing.