Lump sum or DCA in a Roth?
Lump sum or DCA in a Roth?
I convinced my girlfriend to fund her schwab roth IRA recently. She put in a transfer for the whole 5500 and told me to invest it for her. I'm going to invest in either SWPPX or SWTSX. Would you guys recommend I invest the full 5500 all at once or use the dollar cost average method? Thanks in advance for any replies.
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Re: Lump sum or DCA in a Roth?
If you look back 30 year later, lump sum and DCA will be virtually the same. Short term, more one will know.
Re: Lump sum or DCA in a Roth?
Interesting, so it's more just personal preference you would say?
Re: Lump sum or DCA in a Roth?
DCA is generally advised for people with salaries during the contribution phase of their retirement. it avoids 'market timing' by simply buying a set amount at fixed intervals as it is earned.
with lump sums, you can still choose to DCA over time, but i think the force of the argument is weakened. what you are doing by DCA a lump sum, is allocating a significantly large portion to cash, and slowly decreasing that allocation over time. does that strategy jive with the rest of your portfolio allocation strategy? if not, then I'd say invest it all at once according to your plan.
with lump sums, you can still choose to DCA over time, but i think the force of the argument is weakened. what you are doing by DCA a lump sum, is allocating a significantly large portion to cash, and slowly decreasing that allocation over time. does that strategy jive with the rest of your portfolio allocation strategy? if not, then I'd say invest it all at once according to your plan.
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Re: Lump sum or DCA in a Roth?
Not for that small amount. I invested my daughter’s Roth IRA at the peak 2007-2008, but around $1000, fast forward she has a lot more than that. Good thing it was small amount. I tend to get too cautious when it’s a larger amount.
Re: Lump sum or DCA in a Roth?
DrGoogle, are you saying you would lump sum 5500 or DCA it?
Re: Lump sum or DCA in a Roth?
No, I wouldn't say that. The better option is to lump sum, some people DCA because they feel like they would regret it too much if it dipped right after they contributed - in general i think those people underestimate their risk aversion overall and would be better off picking an asset allocation that they would be okay lump summing into.
Re: Lump sum or DCA in a Roth?
DrGoogle, are you saying you would lump sum 5500 or DCA it?DrGoogle2017 wrote: ↑Mon Nov 13, 2017 5:36 pm Not for that small amount. I invested my daughter’s Roth IRA at the peak 2007-2008, but around $1000, fast forward she has a lot more than that. Good thing it was small amount. I tend to get too cautious when it’s a larger amount.
Re: Lump sum or DCA in a Roth?
This question is asked hundreds of times every year on the forum. Past history shows that Lump Sum outperforms a one-year DCA about two-thirds of the time and the outperformance averages less than 3%. So one can say that one pays a possible 3% fee if one does DCA. That is, when you read that LS is "better" you may think that "better" is a significant amount when it really isn't.
There are ways to reduce that average 3%.
1. If one's asset allocation is not 100% to equities, then the 3% difference is less, since bonds return less anyways and are closer to cash than they are to equities. Thus, if one's asset allocation is 50:50 stocks:bonds, then the 3% difference is 1.5% or less.
2. If one does BOTH Lump-Sum and DCA, say invest 50% now and DCA the other 50% over a year, then the 3% is 1.5% or less.
3. If one does BOTH 1 and 2 above, then the 3% difference falls to less than 1%.
Since the stock market sometimes goes up or down 1% in a day a few times every year, one can almost say that the question of "Invest all now or DCA?" has an unknowable best answer since one cannot predict the future and the difference is found in the noise level of performance returns anyways.
Mostly I think it boils down to whether you can accept blame if when the investment(s) that you choose lose money.
There are ways to reduce that average 3%.
1. If one's asset allocation is not 100% to equities, then the 3% difference is less, since bonds return less anyways and are closer to cash than they are to equities. Thus, if one's asset allocation is 50:50 stocks:bonds, then the 3% difference is 1.5% or less.
2. If one does BOTH Lump-Sum and DCA, say invest 50% now and DCA the other 50% over a year, then the 3% is 1.5% or less.
3. If one does BOTH 1 and 2 above, then the 3% difference falls to less than 1%.
Since the stock market sometimes goes up or down 1% in a day a few times every year, one can almost say that the question of "Invest all now or DCA?" has an unknowable best answer since one cannot predict the future and the difference is found in the noise level of performance returns anyways.
Mostly I think it boils down to whether you can accept blame if when the investment(s) that you choose lose money.
Re: Lump sum or DCA in a Roth?
For just 5,500, you're thinking too much. It does not matter.Mdr87 wrote: ↑Mon Nov 13, 2017 5:06 pm I convinced my girlfriend to fund her schwab roth IRA recently. She put in a transfer for the whole 5500 and told me to invest it for her. I'm going to invest in either SWPPX or SWTSX. Would you guys recommend I invest the full 5500 all at once or use the dollar cost average method? Thanks in advance for any replies.
Time is the ultimate currency.
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Re: Lump sum or DCA in a Roth?
Yes to lump sump. Sorry I wasn’t clear.Mdr87 wrote: ↑Mon Nov 13, 2017 5:43 pmDrGoogle, are you saying you would lump sum 5500 or DCA it?DrGoogle2017 wrote: ↑Mon Nov 13, 2017 5:36 pm Not for that small amount. I invested my daughter’s Roth IRA at the peak 2007-2008, but around $1000, fast forward she has a lot more than that. Good thing it was small amount. I tend to get too cautious when it’s a larger amount.
Re: Lump sum or DCA in a Roth?
I'm curious what has given rise to asking the question. Is DCA something you read about and wondered if you should do it for some reason?