DCA VS. Lump sum for Roth IRA

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Grundy53
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DCA VS. Lump sum for Roth IRA

Post by Grundy53 » Tue May 07, 2019 5:08 pm

I've been mulling this over for awhile and decided to get the opinions of folks that are a lot smarter than myself. Which option do you think is better. Putting the full allowable amount into your Roth at the beginning of the year? Or dollar cost averaging through out the year? Or does it even make a perceptible difference?

dbr
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Re: DCA VS. Lump sum for Roth IRA

Post by dbr » Tue May 07, 2019 5:41 pm

Where is the money that is being held back and not invested immediately? The question is not an absolute but a comparison.

A general answer is that on average the lump sum will gain more wealth because it will be invested in tax free growth for a longer time. If the alternative investment is also tax free and has the same prospects for return, then it would not matter.

cody69
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Re: DCA VS. Lump sum for Roth IRA

Post by cody69 » Tue May 07, 2019 6:01 pm

I agree with dbr that lump sum is academically recommended for the reasons cited. If you're risk adverse, then there is nothing wrong with DCA across the year.

Myself... I lump sum at the beginning of the year when I'm going into fixed income investments and DCA when contributing to equities.

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Grundy53
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Re: DCA VS. Lump sum for Roth IRA

Post by Grundy53 » Tue May 07, 2019 8:19 pm

dbr wrote:
Tue May 07, 2019 5:41 pm
Where is the money that is being held back and not invested immediately? The question is not an absolute but a comparison.

A general answer is that on average the lump sum will gain more wealth because it will be invested in tax free growth for a longer time. If the alternative investment is also tax free and has the same prospects for return, then it would not matter.
I would just take it out of savings at the beginning of the year. Instead of out of my paycheck every 2 weeks.

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Grundy53
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Re: DCA VS. Lump sum for Roth IRA

Post by Grundy53 » Tue May 07, 2019 8:21 pm

cody69 wrote:
Tue May 07, 2019 6:01 pm
I agree with dbr that lump sum is academically recommended for the reasons cited. If you're risk adverse, then there is nothing wrong with DCA across the year.

Myself... I lump sum at the beginning of the year when I'm going into fixed income investments and DCA when contributing to equities.
I'm not risk adverse and would prefer to do the lump sum. I just wasn't sure if there was something I was missing.

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UpsetRaptor
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Re: DCA VS. Lump sum for Roth IRA

Post by UpsetRaptor » Tue May 07, 2019 8:27 pm

Lump sum beats DCA two thirds of the time. So I always lump sum, because I like being right two thirds of the time.

sarabayo
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Re: DCA VS. Lump sum for Roth IRA

Post by sarabayo » Tue May 07, 2019 8:58 pm

Grundy53 wrote:
Tue May 07, 2019 8:21 pm
cody69 wrote:
Tue May 07, 2019 6:01 pm
I agree with dbr that lump sum is academically recommended for the reasons cited. If you're risk adverse, then there is nothing wrong with DCA across the year.

Myself... I lump sum at the beginning of the year when I'm going into fixed income investments and DCA when contributing to equities.
I'm not risk adverse and would prefer to do the lump sum. I just wasn't sure if there was something I was missing.
There's also the option of contributing the full amount as a lump sum but keeping it in a money market fund inside the IRA to begin with. Then you can DCA from the money market fund into, say, a stock market index fund, as you see fit.

Another point -- rather than thinking of it as "DCA", just think about the initial contribution as being a movement of part of your emergency fund into the IRA. Every time you get a paycheck, that adds money to the part of your emergency fund that lies outside of your IRA, so to keep your emergency fund at the desired level, you invest an equivalent amount from the money market fund in the IRA into a stock market fund in the IRA. So then the DCA is not dictated by market timing impulses or whatever, but just by the timing of your income.

A third, somewhat pedantic, point -- the word you were looking for is "averse", not "adverse". See this explanation.

3funder
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Re: DCA VS. Lump sum for Roth IRA

Post by 3funder » Wed May 08, 2019 7:22 am

My wife and I have done both, depending on the amount of available cash we had at the beginning of the year and the presence or absence of anticipated expenses for big-ticket items.

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grabiner
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Re: DCA VS. Lump sum for Roth IRA

Post by grabiner » Wed May 08, 2019 8:45 pm

Independent of whether you dollar-cost average, putting the full amount into your Roth IRA in January is better than doing it over time. If you have $6000 on January 2 and want to add $500 per month to the stock market, you can buy $500 in stock and $5500 in cash or bonds in the Roth IRA, then move $500 to the stock market each month. By adding the money in January, you avoid taxes on the interest.

You might do this for reasons unrelated to dollar cost averaging. If the Roth IRA contribution would require using some of your emergency fund, leave that part of your emergency fund in cash or short-term bonds in the Roth. You can withdraw the money tax-free in an emergency, and if you don't have an emergency, you get tax-free growth while you rebuild your taxable emergency fund so that the Roth money can go into stock.
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jyoung
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Re: DCA VS. Lump sum for Roth IRA

Post by jyoung » Thu May 09, 2019 5:13 am

I "DCA" weekly but it's more an issue of cash flow than anything else. If I made more money, or kept a higher balance in my liquid first tier emergency account I would consider lump sum and just pay myself back throughout the year. But that's the method that works for me and has inertia since everything is setup to work that way and changing it sounds like a hassle!

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vineviz
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Re: DCA VS. Lump sum for Roth IRA

Post by vineviz » Sat May 11, 2019 8:03 am

Grundy53 wrote:
Tue May 07, 2019 5:08 pm
I've been mulling this over for awhile and decided to get the opinions of folks that are a lot smarter than myself. Which option do you think is better. Putting the full allowable amount into your Roth at the beginning of the year? Or dollar cost averaging through out the year? Or does it even make a perceptible difference?
Both strategies (once every January vs. once every pay period) are forms of dollar cost averaging: the only differed is the periodicity.

The primary goal, as others have pointed out, is to get your money invested in the market as soon as possible in your long-term asset allocation (regardless of which type of account is immediately available). This should be done as regularly as you earn the money.

The timing of the transfer from taxable account to Roth IRA is essentially immaterial, though there may be a modest tax-compounding advantage to front-loading the annual contribution in January.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

LittleD
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Re: DCA VS. Lump sum for Roth IRA

Post by LittleD » Sat May 11, 2019 8:25 am

In most historical studies, Lump Sum investing beats DCA in comparisons. The stock market is not cheap today by most measures so if you are mostly Buy & Hold, I would DCA until we get that manic selloff that is bound to come someday in the future. At that point, at the stroke of maximum pessimism, I would lump sum into your holdings and be happy.

Grogs
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Re: DCA VS. Lump sum for Roth IRA

Post by Grogs » Sat May 11, 2019 9:30 am

Assuming one buys the premise that lump sum is usually better than DCA (which I do), it's not as simple as it sounds. How is it that you came to have $6k sitting in your bank account ready to invest in your Roth on January 1st? For me, I do it by turning off my taxable investments for a couple of months at the end of the year. So outside of my 401k, my investing looks like this:

January: Fully fund Roth
February-October: Contribute to taxable account
November-December: Save up funds for the next year's Roth purchase

So the Roth is benefiting from the lump sum, but that's at least partially offset by the fact I held that money in a savings account for 1-2 months waiting to invest it in the Roth. This system works for me, but I don't believe it's a big difference over just contributing $500/month to the Roth.

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Earl Lemongrab
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Re: DCA VS. Lump sum for Roth IRA

Post by Earl Lemongrab » Sat May 11, 2019 1:42 pm

The yearly IRA contribution is a relatively small amount, even for new investors. It's not likely to make much difference. If you have the cash at the start of the year, and there's no question about eligibility, I would get it done.
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Grundy53
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Re: DCA VS. Lump sum for Roth IRA

Post by Grundy53 » Tue May 14, 2019 8:44 am

Thanks everyone for the advice. I appreciate it.

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zonto
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Re: DCA VS. Lump sum for Roth IRA

Post by zonto » Wed May 15, 2019 7:06 am

Vanguard put out this relevant paper a few years ago: https://personal.vanguard.com/pdf/ISGIRA18.pdf
“Diversification is about accepting good enough while missing out on great but avoiding terrible.” - Ben Carlson

JustinR
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Re: DCA VS. Lump sum for Roth IRA

Post by JustinR » Wed May 15, 2019 6:30 pm

Always invest all your available investable cash as soon as possible.

No other strategy makes sense.

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