## Rick's Rules for Lump Sum Investing

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umfundi
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### Re: Rick's Rules for Lump Sum Investing

bob90245 wrote: No, not exactly the same. But close. We can use math to find out.

For 12 months

Plan A: 50% cash, 50% stocks.
Equivalent to 6/12 each month or 6*12 = 72 for 12 months.

By the way, lump sum would be 100% stocks for 12 months, or 12/12 each month, or 12*12 = 144 for 12 months

Plan B: DCA 1/12 first month, 2/12 second month, and so on to 12/12 in 12th month
Or 1+2+3+4+5+6+7+8+9+10+11+12 = 78

Summarizing... Plan A was 72 and Plan B was 78.
Bob,

By your arithmetic the plans are exactly the same. You misread Plan B.

Plan B is 1/11 + 2/11 .... +11/11 + 0 = 0.5

Yes, Plan A is 0.5.

Are they really the same?

LS is 1.0, but that is irrelevant to my question here.

Keith
Déjà Vu is not a prediction

iceport
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### Re: Rick's Rules for Lump Sum Investing

:undecided

(Is it safe to come back and talk without being ridiculed and called names? I hope so. This doesn't have to be such an unpleasant discussion.)
tadamsmar wrote:One correction: Pete is indeed saying this or that pile of money has more risk when invested as a lump sum.

To which Pete are you referring? The Pete with a foggy view of the White Mountains for an avatar? If it's me, I'm not sure where you're getting that idea. You might be able to find a passage I wrote that you interpret as contradicting this, but as I see things, it's not so much that one pile of money has more risk than another, it's that the act of transferring money from one pile to another involves risk.

--Pete
"Discipline matters more than allocation.” ─William Bernstein

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### Re: Rick's Rules for Lump Sum Investing

555 wrote:

(Also, the 11 page Finally! Can we lay DCA to rest and ban this topic forever? mentioned by tadamsmar.)
I was wondering about that. OK, it's removed. However, I added the Trainor paper (under Academic Papers).

Wiki article link: Dollar cost averaging

To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

555
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### Re: Rick's Rules for Lump Sum Investing

`... the source of your nest egg is not a factor in the decision to either LS or DCA.'.
555 wrote:This statement is silly. As an intellectual challenge, I'll leave people to figure out why.
tadamsmar wrote:The point is that the source of your invested dollars does not make them have a higher return, the source of your invested dollars does not make one dollar more valuable than another. The fact that some of your invested dollars were recently in the bank account of your rich uncle who was hit by a truck does not make those particlular dollars more or less subject to investment risk.
555 wrote:No, that totally misses the real point. Keep thinking about it. Hint: the past was once the future.
555 wrote:Well, have you figured it out yet? Ya need another hint?
tadamsmar wrote: I may get a lump sum soon from the sale of a farm.
555 wrote:So why didn't you already invest it yesterday? :roll: :roll: :roll: :roll:
tadamsmar wrote:I have not sold it yet. It may happen in the future. Perhaps you missed that.
(Now you are getting the hang of it! Just roll you eyes five times if you want to call my post ridiculous )
I didn't miss a thing. You're expecting a lump sum. You plan to buy some stocks with it the day you get it. Why haven't you bought those stocks already? By now you could already have justed shifted some bonds to stocks in your tax-sheltered retirement account in anticipation of your expected lump sum.

But a surprise lump sum that you suddenly receive without warning is another matter.

You see, the souce of the lump sum really does matter. It's not just a question of when the cash hits your account. It's the entire history of information that has been available to you at various times that matters (there are other complexities too).

555
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### Re: Rick's Rules for Lump Sum Investing

petrico wrote:...it's not so much that one pile of money has more risk than another, it's that the act of transferring money from one pile to another involves risk.
Yes. This is an important point, the bears repeating.

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### Re: Rick's Rules for Lump Sum Investing

555 wrote:
`... the source of your nest egg is not a factor in the decision to either LS or DCA.'.
555 wrote:This statement is silly. As an intellectual challenge, I'll leave people to figure out why.
tadamsmar wrote:The point is that the source of your invested dollars does not make them have a higher return, the source of your invested dollars does not make one dollar more valuable than another. The fact that some of your invested dollars were recently in the bank account of your rich uncle who was hit by a truck does not make those particlular dollars more or less subject to investment risk.
555 wrote:No, that totally misses the real point. Keep thinking about it. Hint: the past was once the future.
555 wrote:Well, have you figured it out yet? Ya need another hint?
tadamsmar wrote: I may get a lump sum soon from the sale of a farm.
555 wrote:So why didn't you already invest it yesterday? :roll: :roll: :roll: :roll:
tadamsmar wrote:I have not sold it yet. It may happen in the future. Perhaps you missed that.
(Now you are getting the hang of it! Just roll you eyes five times if you want to call my post ridiculous )
I didn't miss a thing. You're expecting a lump sum. You plan to buy some stocks with it the day you get it. Why haven't you bought those stocks already? By now you could already have justed shifted some bonds to stocks in your tax-sheltered retirement account in anticipation of your expected lump sum.

But a surprise lump sum that you suddenly receive without warning is another matter.

You see, the souce of the lump sum really does matter. It's not just a question of when the cash hits your account. It's the entire history of information that has been available to you at various times that matters (there are other complexities too).
I guess there is a certain logic to your reasoning. I am arguably planning to increase my risk and expected return after I sell the farm, so why not do it now? I have to think about it a bit.

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### Re: Rick's Rules for Lump Sum Investing

555 wrote:
petrico wrote:...it's not so much that one pile of money has more risk than another, it's that the act of transferring money from one pile to another involves risk.
Yes. This is an important point, the bears repeating.
Ok, let's travel the same old road using the word "decision".

I have hundreds of thousands of dollars in relatively risky mutual funds that can be moved to money market funds before the close of trading tomorrow. I can do this and then DCA the money back in without paying any fees or being prevented by any trading curbs. I decide to not do this.

I have to make this decision every single trading day in order to stay the course.

Don't these decisions involve the same risk as the decision to invest a similar size windfall as a LS into those same mutual funds rather than DCA the windfall in?

iceport
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### Re: Rick's Rules for Lump Sum Investing

You need to buy a winter coat. There's only one store you can buy it from. You've been watching the price of the coats in this store, and you've determined that 50% of the time the coats are on sale for 10% off, 17% of the time the coats sell for MSRP, and 33% of the time the coats are marked up 20%.

So when will you buy your coat? You'd certainly prefer a sale day. You could accept a normal price day. But on any day with a surcharge, you would spend more money that the coat is worth.

The only trouble is, each day the price is set at random according to the observed odds. EDIT: And of course, you must commit to your purchase before the daily price is known. However, the store also has a layaway plan in which you can divide your coat purchase into 12 installments, which can be made on consecutive days if you wish.

So what is the best way to proceed?

One logical way to look at it is that on average, the coat is priced fairly most of the time, so you should just go ahead and buy the coat on any random day. The odds are in your favor. You will probably get a fair price. (Then again, you might end up overpaying by 20%.)

Is it completely illogical to use the layaway plan in this situation? EDIT: Note that the expected price with the layaway plan is a 1.6% surcharge above MSRP.

(Even if you find that this analogy is flawed, first just consider the extremely contrived situation separately. Then feel free to describe where the analogy breaks down.)

Thanks,
--Pete
Last edited by iceport on Wed Dec 07, 2011 9:57 pm, edited 2 times in total.
"Discipline matters more than allocation.” ─William Bernstein

iceport
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### Re: Rick's Rules for Lump Sum Investing

555 wrote:
petrico wrote:...it's not so much that one pile of money has more risk than another, it's that the act of transferring money from one pile to another involves risk.
Yes. This is an important point, the bears repeating.
Ok, let's travel the same old road using the word "decision".

I have hundreds of thousands of dollars in relatively risky mutual funds that can be moved to money market funds before the close of trading tomorrow. I can do this and then DCA the money back in without paying any fees or being prevented by any trading curbs. I decide to not do this.

I have to make this decision every single trading day in order to stay the course.

Don't these decisions involve the same risk as the decision to invest a similar size windfall as a LS into those same mutual funds rather than DCA the windfall in?
If the goal is to be invested, it would make no sense to sell and re-purchase your risky assets. You'd be compounding the risk of getting a decent sale or purchase price. You're just as likely to get an anomalous price upon the sale as you are upon the purchase. You'd be compounding the very risk DCA is intended to mitigate.

--Pete
"Discipline matters more than allocation.” ─William Bernstein

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### Re: Rick's Rules for Lump Sum Investing

petrico wrote:
555 wrote:
petrico wrote:...it's not so much that one pile of money has more risk than another, it's that the act of transferring money from one pile to another involves risk.
Yes. This is an important point, the bears repeating.
Ok, let's travel the same old road using the word "decision".

I have hundreds of thousands of dollars in relatively risky mutual funds that can be moved to money market funds before the close of trading tomorrow. I can do this and then DCA the money back in without paying any fees or being prevented by any trading curbs. I decide to not do this.

I have to make this decision every single trading day in order to stay the course.

Don't these decisions involve the same risk as the decision to invest a similar size windfall as a LS into those same mutual funds rather than DCA the windfall in?
If the goal is to be invested, it would make no sense to sell and re-purchase your risky assets. You'd be compounding the risk of getting a decent sale or purchase price. You're just as likely to get an anomalous price upon the sale as you are upon the purchase. You'd be compounding the very risk DCA is intended to mitigate.

--Pete
The goal is obviously not to be invested. The goal is exactly the same goal one accomplishes by DCAing in a lump sum windfall. The goal is to avoid a risky decision that I will regret if the market tanks. If the goal was to be invested, I would just invest the darn windfall immediately.

iceport
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### Re: Rick's Rules for Lump Sum Investing

tadamsmar wrote:The goal is obviously not to be invested. The goal is exactly the same goal one accomplishes by DCAing in a lump sum windfall. The goal is to avoid a risky decision that I will regret if the market tanks. If the goal was to be invested, I would just invest the darn windfall immediately.

Okay, that's funny. (Not your underlying point -- which I get. Don't take that the wrong way.)

--Pete
"Discipline matters more than allocation.” ─William Bernstein

555
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### Re: Rick's Rules for Lump Sum Investing

555 wrote:
petrico wrote:...it's not so much that one pile of money has more risk than another, it's that the act of transferring money from one pile to another involves risk.
Yes. This is an important point, the bears repeating.
Ok, let's travel the same old road using the word "decision".

I have hundreds of thousands of dollars in relatively risky mutual funds that can be moved to money market funds before the close of trading tomorrow. I can do this and then DCA the money back in without paying any fees or being prevented by any trading curbs. I decide to not do this.

I have to make this decision every single trading day in order to stay the course.

Don't these decisions involve the same risk as the decision to invest a similar size windfall as a LS into those same mutual funds rather than DCA the windfall in?
That doesn't prove what you want. Instead it shows that it matters where the money came from and the history of events and information matters. What would be your reason to sell all your stocks one day?

I know your just giving some well known old argument, but it's just wrong.

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### Re: Rick's Rules for Lump Sum Investing

555 wrote:
555 wrote:
petrico wrote:...it's not so much that one pile of money has more risk than another, it's that the act of transferring money from one pile to another involves risk.
Yes. This is an important point, the bears repeating.
Ok, let's travel the same old road using the word "decision".

I have hundreds of thousands of dollars in relatively risky mutual funds that can be moved to money market funds before the close of trading tomorrow. I can do this and then DCA the money back in without paying any fees or being prevented by any trading curbs. I decide to not do this.

I have to make this decision every single trading day in order to stay the course.

Don't these decisions involve the same risk as the decision to invest a similar size windfall as a LS into those same mutual funds rather than DCA the windfall in?
That doesn't prove what you want. Instead it shows that it matters where the money came from and the history of events and information matters. What would be your reason to sell all your stocks one day?
My reason for doing this is that you have finally convinced me that I should avoid the risk involved in putting or leaving a lump sum in the market. The decision to leave a lump sum in the market involves the same risk as does the decision to put a lump sum in the market.

investor999
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### Re: Rick's Rules for Lump Sum Investing

One of the most important components of the Boglehead strategy is to Sell High and Buy Low.

If I were fully invested right now I would be selling my S&P/VTI and buying TBM or TIBM.

But since I am not invested yet, the "right" move is to lump sum and limit my ability to balance my AA with a smaller amount of new funds, instead of investing half and then contributing a larger amount over 6-12 months to only the weaker assets?

Lump sum makes sense to me in some ways, but it does seem contradictory to buying weak assets.

I have a set allocation planned, and will likely lump sum- but if someone could help me with that point I'd appreciate it for peace of mind.

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### Re: Rick's Rules for Lump Sum Investing

One of the most important components of the Boglehead strategy is to Sell High and Buy Low.

If I were fully invested right now I would be selling my S&P/VTI and buying TBM or TIBM.

But since I am not invested yet, the "right" move is to lump sum and limit my ability to balance my AA with a smaller amount of new funds, instead of investing half and then contributing a larger amount over 6-12 months to only the weaker assets?

Lump sum makes sense to me in some ways, but it does seem contradictory to buying weak assets.

I have a set allocation planned, and will likely lump sum- but if someone could help me with that point I'd appreciate it for peace of mind.
Not sure what you mean. If you own the lump sum then it is part of your AA. It would be pretend accounting to have some cash and to think the cash is not part of the AA. This would not be clear thinking.

investor999
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### Re: Rick's Rules for Lump Sum Investing

I understand that perspective, but if VTI is outperforming other assets, wouldn't it make sense to buy the weaker/depressed assets first?

In other words, invest 50%-60% of the capital, and then only invest when an asset hits it's 5 percent loss threshold? If I were to do this over 6 months, would I not be buying most of my assets while they were "on sale"? When one asset Zigs, Ill buy the asset that Zags until I run out of my investable resources? At which point I would switch to the Selling of Appreciated (5% gain) assets instead, and using those gains to buy the "onsale" assets?

In other words, is there an issue with investing most of my lump sum, and then investing in assets in my allocation that are "on-sale", instead of selling the performing assets.

Is this really much worse that Lump Sum? Is this Value Averaging that I have heard mentioned?

Thanks all!
D