Dumb lump sum question

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Stipe
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Dumb lump sum question

Post by Stipe » Sat Jan 27, 2018 6:52 pm

Hey BGh’s
If I am going to invest a lump sum into my 80-20 investments (vg 4 funds)...and let’s say I put it in at 26500 Dow, if it drops to 24000, do I have to wait until it its back to 26500 for me to be back at even? Or does it negate that with simple compounding? I know it’s market timing but my pas says it’s a wise decision to put it in now....
46 yrs old
Thx

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oldcomputerguy
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Re: Dumb lump sum question

Post by oldcomputerguy » Sat Jan 27, 2018 7:02 pm

Stipe wrote:
Sat Jan 27, 2018 6:52 pm
Hey BGh’s
If I am going to invest a lump sum into my 80-20 investments (vg 4 funds)...and let’s say I put it in at 26500 Dow, if it drops to 24000, do I have to wait until it its back to 26500 for me to be back at even? Or does it negate that with simple compounding? I know it’s market timing but my pas says it’s a wise decision to put it in now....
46 yrs old
Thx
In general, compounding should work over the long term to increase the value of your holdings. I can honestly say that I never have looked at the current value of the Dow nor of the S&P500 when I put money into the market; when I had money, I invested.
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

dbr
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Re: Dumb lump sum question

Post by dbr » Sat Jan 27, 2018 7:18 pm

Stipe wrote:
Sat Jan 27, 2018 6:52 pm
Hey BGh’s
If I am going to invest a lump sum into my 80-20 investments (vg 4 funds)...and let’s say I put it in at 26500 Dow, if it drops to 24000, do I have to wait until it its back to 26500 for me to be back at even? Or does it negate that with simple compounding? I know it’s market timing but my pas says it’s a wise decision to put it in now....
46 yrs old
Thx
A couple of problems, maybe more than that, but a couple of serious ones. The first serious one is that you are not invested in the DOW, so that index is irrelevant. A second problem, also serious, is that indices such as S&P 500, DOW are price indices that do not include the dividends paid. The actual return from a holding will be higher. If you look at a report of returns for your funds, those do include dividends and are net after expenses.

As far as the math, you are sort of right. You need to look at the dollar value of your holding. You are even when the dollar value returns to what it was to start with. A most logical way to do that consistent with the way returns are defined is to have reinvested all the dividends along the way. If you take away the dividends as they are paid it becomes somewhat cloudy as to what it means to say your are "even." Obviously it also applies that you are not even if you get back to the same number of dollars but partly by adding new money along the way.

I am not sure what your question has to do with either compounding or the question of lump sum vs so called DCA.
Last edited by dbr on Sat Jan 27, 2018 7:36 pm, edited 1 time in total.

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willthrill81
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Re: Dumb lump sum question

Post by willthrill81 » Sat Jan 27, 2018 7:23 pm

Stipe wrote:
Sat Jan 27, 2018 6:52 pm
Hey BGh’s
If I am going to invest a lump sum into my 80-20 investments (vg 4 funds)...and let’s say I put it in at 26500 Dow, if it drops to 24000, do I have to wait until it its back to 26500 for me to be back at even? Or does it negate that with simple compounding? I know it’s market timing but my pas says it’s a wise decision to put it in now....
46 yrs old
Thx
Apart from dividends and inflation along the way, yes. If you buy an asset for $100 and it drops in value to $90, it must go back up to $100 for you to be back where you were.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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FiveK
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Re: Dumb lump sum question

Post by FiveK » Sat Jan 27, 2018 7:33 pm

Index values reported in the press, such as the S&P 500, DJIA, etc., are usually based on some "weighted average stock price". What they don't usually measure is the dividends paid by those stocks.

An index fund, however, captures those dividends, so you have to look at your total return in the funds, not just the index price.

Stonebr
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Re: Dumb lump sum question

Post by Stonebr » Sat Jan 27, 2018 9:42 pm

Stipe wrote:
Sat Jan 27, 2018 6:52 pm
but my pas says it’s a wise decision to put it in now....
"The best time to invest is when you have the money." -- John Templeton
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear

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Watty
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Re: Dumb lump sum question

Post by Watty » Sat Jan 27, 2018 10:03 pm

There is a wiki that covers dollar cost averaging vs lump sum investing if you have not seen that.

https://www.bogleheads.org/wiki/Dollar_cost_averaging
Stipe wrote:
Sat Jan 27, 2018 6:52 pm
Dow, if it drops to 24000, do I have to wait until it its back to 26500 for me to be back at even? Or does it negate that with simple compounding?
If you rephrase that as "I buy a mutual fund and it drops by 20%, do I have to wait for it to get back to the original price to get even?" you don't have to worry about the details of the Dow or dividends.

The answer to that depends on if you are still making contributions to the savings and how big those are relative to account value.

For example if the mutual fund at 100 when you make a $10,000 lump sum investment(100 shares) and it goes down to $80 when you may another $1,000 contribution(12.5 shares) then you have $9,000 in the mutual fund (112.5). In the meantime you might have gotten a dividend of 2.5 shares so you would then have 115 shares.

To "break even" the value of the mutual fund would need to get up to $11,000 so the share price would need to get to $95.65(11,000/115)

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