Lump sum investment or DCA?

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healthiswealth
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Lump sum investment or DCA?

Post by healthiswealth »

I finally setup a trust account for personal investing. Should I invest a lump sum this week, 20k in the total stock market, or DCA monthly for 2017. I'm interested in accelerating my retirement savings.

I'm 41, I max out my 401k and IRA, using the 3 fund approach. Target retirement age is 68.

I contribute to 529 and my only debt is my mortgage.

I have a lot of CDs, which will mature this year (250k) and others totaling 250k that will mature next year.

In addition, I have a 12 month emergency fund.

No major purchase required for the next 10 years. Should I invest the cd money in VTSMX and VTSIX as it matures lump sum or DCA?
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Fudgie
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Re: Lump sum investment or DCA?

Post by Fudgie »

:oops:
Last edited by Fudgie on Fri Dec 08, 2017 7:06 am, edited 1 time in total.
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randomizer
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Re: Lump sum investment or DCA?

Post by randomizer »

Lump sum it. Time in the market beats timing the market.
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Topic Author
healthiswealth
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Re: Lump sum investment or DCA?

Post by healthiswealth »

Thank you!
sharing the probability of outcome for both options is helpful
zuma
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Re: Lump sum investment or DCA?

Post by zuma »

If you are more concerned about maximizing long-term gain, then lump sum.

If you are more concerned about reducing short-term downside risk, then DCA.
dbr
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Re: Lump sum investment or DCA?

Post by dbr »

Please look up and read the many previous threads on this subject.

There will be no more comments from me.
NiceUnparticularMan
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Re: Lump sum investment or DCA?

Post by NiceUnparticularMan »

DCA is the same thing as temporarily deciding to increase the cash portion of your asset allocation, with the plan to bring it back to your original target allocation over the designated period. That is why it both decreases expected returns and decrease short-term volatility, because that is what increasing the cash portion of your asset allocation is expected to do in general.

If you were happy with your original target allocation, it is reasonable to ask why you would want to do that. But there is a non-financial answer to that question, which is that despite the lack of an expected financial benefit, it could help you avoid some pretty bad psychological scenarios (which could involve you, or also maybe a spouse, or so on). In fact, in some cases it could help you get over being paralyzed into inaction by the fear of such scenarios.

In my view, that is really about it. It has no expected financial benefit other than what you would expect from a temporary shift to cash in your asset allocation. But you might reasonably do it anyway for what we might loosely call psychological reasons.
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bertilak
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Re: Lump sum investment or DCA?

Post by bertilak »

NiceUnparticularMan wrote:DCA is the same thing as temporarily deciding to increase the cash portion of your asset allocation, with the plan to bring it back to your original target allocation over the designated period. That is why it both decreases expected returns and decrease short-term volatility, because that is what increasing the cash portion of your asset allocation is expected to do in general.

If you were happy with your original target allocation, it is reasonable to ask why you would want to do that. But there is a non-financial answer to that question, which is that despite the lack of an expected financial benefit, it could help you avoid some pretty bad psychological scenarios (which could involve you, or also maybe a spouse, or so on). In fact, in some cases it could help you get over being paralyzed into inaction by the fear of such scenarios.

In my view, that is really about it. It has no expected financial benefit other than what you would expect from a temporary shift to cash in your asset allocation. But you might reasonably do it anyway for what we might loosely call psychological reasons.
I agree, with a couple of comments:
  • If the amount involved is large enough to make you rethink your AA then DCA gives you the chance to change your mind. All the math that proves LS is better (has better expectations) assume one would faithfully carry out the DCA plan to completion. Perhaps a little time to ponder a significant change in one's financial situation is a good thing.
  • Even though DCA is truly a mathematical "mistake" is is not a big enough one to worry about.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
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Sandtrap
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Re: Lump sum investment or DCA?

Post by Sandtrap »

DCA at the rate and amount that allows one to sleep at night. The "sleep factor" is unique to everyone. No right or wrong in the bigger picture.
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SmileyFace
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Re: Lump sum investment or DCA?

Post by SmileyFace »

Lump Sum.
If you DCA you are essentially saying "I know what my target asset allocation is; but I'm not going to use it, instead - I'm going to spend some amount of time with a far more conservative asset allocation by keeping a percentage in cash for a period of time - I will slowly glide into my desired asset allocation". Multiple studies have shown that DCA'ing when you have a large lump sum will much more likely cause you to lose.
NiceUnparticularMan
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Re: Lump sum investment or DCA?

Post by NiceUnparticularMan »

bertilak wrote:If the amount involved is large enough to make you rethink your AA then DCA gives you the chance to change your mind. All the math that proves LS is better (has better expectations) assume one would faithfully carry out the DCA plan to completion. Perhaps a little time to ponder a significant change in one's financial situation is a good thing.
I'd actually go to the other extreme in these situations. I like the "Windfall" advice in the Bogleheads wiki: stick it in something safe for a year while you think about what you really want to do. DCA is certainly a variation on this theme, but I think it might be more advisable to follow that advice.
Even though DCA is truly a mathematical "mistake" is is not a big enough one to worry about.
So the thing is, it could under some circumstances be a big "mistake".

If you are talking about just a small fraction of what you will invest over a lifetime, then yes, it really makes little difference. But if this is a significant portion of what you might invest, and you happen to miss one of the small number of really great market run-ups we sometimes see, it might result in a significantly smaller portfolio even in the long run.

I don't mean to scare people into lump summing, but I think we should be clear that there is in fact long term risk either way, if it is a lot of money at stake.
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SmileyFace
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Re: Lump sum investment or DCA?

Post by SmileyFace »

NiceUnparticularMan wrote:
bertilak wrote:If the amount involved is large enough to make you rethink your AA then DCA gives you the chance to change your mind. All the math that proves LS is better (has better expectations) assume one would faithfully carry out the DCA plan to completion. Perhaps a little time to ponder a significant change in one's financial situation is a good thing.
I'd actually go to the other extreme in these situations. I like the "Windfall" advice in the Bogleheads wiki: stick it in something safe for a year while you think about what you really want to do. DCA is certainly a variation on this theme, but I think it might be more advisable to follow that advice.
Even though DCA is truly a mathematical "mistake" is is not a big enough one to worry about.
So the thing is, it could under some circumstances be a big "mistake".

If you are talking about just a small fraction of what you will invest over a lifetime, then yes, it really makes little difference. But if this is a significant portion of what you might invest, and you happen to miss one of the small number of really great market run-ups we sometimes see, it might result in a significantly smaller portfolio even in the long run.

I don't mean to scare people into lump summing, but I think we should be clear that there is in fact long term risk either way, if it is a lot of money at stake.
Following this logic - if most of my retirement fund is already invested - should I remove a lot of it and then DCA it back in so I don't miss your run-up? You are essentially creating a more conservative portfolio and gliding into a less conservative one by DCAing. If you are certain of your AA - DCAing is a mistake - nothing more than trying to time the market.
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bertilak
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Re: Lump sum investment or DCA?

Post by bertilak »

NiceUnparticularMan wrote:
Even though DCA is truly a mathematical "mistake" is is not a big enough one to worry about.
So the thing is, it could under some circumstances be a big "mistake"
When evaluating a mistake (or not) we CANNOT look at specific future circumstances. The analysis can only work on expectations we currently have. What we will know at some future date cannot be taken into account in our current calculations because that is information we do not yet have. Looking back from the future we will know with certainty what course of action was best (or worst). There will be no "could under some circumstances" about it.

From today's perspective any course of action could be a big mistake or a big win or anywhere between. We won't know until the future. Today we need to work with the odds and the odds do favor Lump Sum over DCA, but -- here's my point -- not by much. Actual results could be dramatic (or not). We just don't know yet.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
NiceUnparticularMan
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Re: Lump sum investment or DCA?

Post by NiceUnparticularMan »

bertilak wrote:When evaluating a mistake (or not) we CANNOT look at specific future circumstances. The analysis can only work on expectations we currently have. What we will know at some future date cannot be taken into account in our current calculations because that is information we do not yet have. Looking back from the future we will know with certainty what course of action was best (or worst). There will be no "could under some circumstances" about it.
But isn't risk management about looking at the range of possible outcomes?

Let's consider a relatively extreme case of this being the only money you will ever invest. You decide to DCA over 5 months, 20% each month. After the first installment, there is a 30% run-up in your target mix. At the end of the year, your portfolio is now 24% smaller than it would have been, because 80% of your portfolio missed the 30% run-up.

And that's never going to be fixed.

All this is just the opposite side of the coin--people are worried about stocks suddenly dropping soon after they lump sum, which certainly could happen, and if it does happen, they experience a permanent loss. But they could also go up a bunch while they are waiting to DCA, and that also creates a permanent loss. There are some good theories about why psychologically, missing a run-up may be less traumatic for many people than catching the drop. But mathematically, they both could be "big" mistakes if this is a lot of what the investor is ever going to invest.
Today we need to work with the odds and the odds do favor Lump Sum over DCA, but -- here's my point -- not by much.
So I like to think in terms of probability distributions over outcomes. Expected returns are the summation of the probability distribution over the various return outcomes. And it is certainly true the expected returns are not going to be much different as long as you assume a long time invested. However, that is consistent with the fact there is a substantial chance of a big difference of outcome, which could in fact be either way.

Again, the risk of a big permanent loss due to an untimely drop following lump-summing is real. So is the risk of a big permanent loss due to an untimely run-up while waiting to DCA. Expected returns include all this in their calculations, but that doesn't mean these are not real and substantial risks.
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Re: Lump sum investment or DCA?

Post by NiceUnparticularMan »

DaftInvestor wrote:Following this logic - if most of my retirement fund is already invested - should I remove a lot of it and then DCA it back in so I don't miss your run-up? You are essentially creating a more conservative portfolio and gliding into a less conservative one by DCAing. If you are certain of your AA - DCAing is a mistake - nothing more than trying to time the market.
I was actually pointing out the opposite--the risk to DCA rather than lump sum is missing a run-up, and missing a run-up can cause a significant permanent loss if the investment being DCA is a significant portion of what will ever be invested.
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bertilak
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Re: Lump sum investment or DCA?

Post by bertilak »

NiceUnparticularMan wrote: But isn't risk management about looking at the range of possible outcomes?

Let's consider a relatively extreme case of this being the only money you will ever invest. You decide to DCA over 5 months, 20% each month. After the first installment, there is a 30% run-up in your target mix. At the end of the year, your portfolio is now 24% smaller than it would have been, because 80% of your portfolio missed the 30% run-up.
It's just as fair to look at the opposite end of the range: You might have missed a 30% crash.

And that's never going to be fixed.

That's why we need to look at things in terms of expected results. If you want guarantees there are other approaches besides investing in the market.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
NiceUnparticularMan
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Re: Lump sum investment or DCA?

Post by NiceUnparticularMan »

bertilak wrote:It's just as fair to look at the opposite end of the range: You might have missed a 30% crash. And that's never going to be fixed.
Exactly.
That's why we need to look at things in terms of expected results. If you want guarantees there are other approaches besides investing in the market.
Well, I would say when you have a probability distribution over a wide variety of possible return outcomes and you collapse it into a single expected return value, you have lost a lot of information. One way of trying to preserve some of that information is to report things like standard deviations.

But all that can be tough to interpret intuitively. Given a CAGR and Stdev for two long-term portfolios, the differences may not look all that big. But thanks to compounding, small differences in CAGR can add up to large differences in outcome over a long period. Similarly small differences in Stdev calculated over a long period can mask the wide range of possible outcomes in the end.

I do believe it is correct that if the amount in question is small relative to the total amount ever invested, it still won't matter much. But I think people intuitively understand that it matters quite a bit more with a large amount, and the math does not actually suggest they are wrong. It just doesn't suggest a way of improving their odds either.
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SmileyFace
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Re: Lump sum investment or DCA?

Post by SmileyFace »

The bottom line is that your Asset Allocation should account for the ups and downs of the market and your given risk/return disposition. You shouldn't use DCA to help accommodate it or somehow make yourself feel better.
As per Vanguard:
"Our research indicates that it's prudent to invest a lump sum immediately."

https://investor.vanguard.com/investing ... um?lang=en

Once you decide on an asset allocation - put your money to work.
Chadnudj
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Re: Lump sum investment or DCA?

Post by Chadnudj »

healthiswealth wrote:I finally setup a trust account for personal investing. Should I invest a lump sum this week, 20k in the total stock market, or DCA monthly for 2017. I'm interested in accelerating my retirement savings.

I'm 41, I max out my 401k and IRA, using the 3 fund approach. Target retirement age is 68.

I contribute to 529 and my only debt is my mortgage.

I have a lot of CDs, which will mature this year (250k) and others totaling 250k that will mature next year.

In addition, I have a 12 month emergency fund.

No major purchase required for the next 10 years. Should I invest the cd money in VTSMX and VTSIX as it matures lump sum or DCA?
Based on the hypothetical, it actually sounds like you'll get to do a bit of both.

You can lump sum this $20k now (which is the right move).

Then you will effectively dollar cost average the $500k in CDs as they each mature (by "lump summing" them individually whenever they mature into your AA).
TBillT
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Re: Lump sum investment or DCA?

Post by TBillT »

Well I hear what they say about lump sum, but my DIY approach is slower dabbling. I am happy Vanguard Prime MM is getting into 1% range as that is a place to sit.

I've had such a hard time seeing good "buys" these days, I have started going into some 3% IRA CD's (Andrew's FCU) which has helped me to feel like I got the cash working for me. The Andrews 3% CD is not currently available, but lots of discussion here among the Bogleheads about where to find the best CD's as they pop up.
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healthiswealth
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Re: Lump sum investment or DCA?

Post by healthiswealth »

Thanks everyone
Good points to consider
Eventually the CDs I transfer to my trust account will make up 50% of my retirement portfolio. And I will recalibrate my investments to be 70/30 stocks to bonds.
CurlyDave
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Re: Lump sum investment or DCA?

Post by CurlyDave »

Most people can set aside a percentage of each paycheck. Essentially investing it as they earn it. This is just the normal method of saving money.

The financial industry invented a fancy term for this: "Dollar Cost Averaging", and everyone who saves now feels better about themselves because they are using a very sophisticated investment technique. I call BS -- it is nothing more than the typical way of saving and investing from an income stream.

OTOH, you have accumulated what you think of as a non-invested lump sum. Again, I call BS. It is actually invested in whatever bank account you have it in. Move it to your desired asset allocation in one fell swoop. Then continue to DCA from your future income.
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Re: Lump sum investment or DCA?

Post by dbr »

CurlyDave wrote:Most people can set aside a percentage of each paycheck. Essentially investing it as they earn it. This is just the normal method of saving money.

The financial industry invented a fancy term for this: "Dollar Cost Averaging", and everyone who saves now feels better about themselves because they are using a very sophisticated investment technique. I call BS -- it is nothing more than the typical way of saving and investing from an income stream.

OTOH, you have accumulated what you think of as a non-invested lump sum. Again, I call BS. It is actually invested in whatever bank account you have it in. Move it to your desired asset allocation in one fell swoop. Then continue to DCA from your future income.
I break my promise not to comment in order to support your post. These comments are correct with one minor quibble.

The quibble is that the original "invention" of DCA was real and an actual benefit. The distinction was between investing a fixed dollar amount at fixed intervals compared to buying a fixed number of shares of a stock at fixed intervals. By simple arithmetic the former results in a lower purchase price per share than the latter. The reason this is an "invention" is that in the old days it was not easy to invest dollar amounts rather than in round lots of shares. Also purchase commissions were high. Today one can invest in mutual funds in dollar amounts at no commission.
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Re: Lump sum investment or DCA?

Post by goingup »

I like the rule of thumb that Rick Ferri once wrote about. If the amount is 20% or less of your total portfolio just lump it in. If it's more than 20% DCA. I'd also add that if the money was invested before then you should get back to being fully invested. If it's "new" money, use the heuristic.
wolf359
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Re: Lump sum investment or DCA?

Post by wolf359 »

healthiswealth wrote:I finally setup a trust account for personal investing. Should I invest a lump sum this week, 20k in the total stock market, or DCA monthly for 2017. I'm interested in accelerating my retirement savings.

I'm 41, I max out my 401k and IRA, using the 3 fund approach. Target retirement age is 68.

I contribute to 529 and my only debt is my mortgage.

I have a lot of CDs, which will mature this year (250k) and others totaling 250k that will mature next year.

In addition, I have a 12 month emergency fund.

No major purchase required for the next 10 years. Should I invest the cd money in VTSMX and VTSIX as it matures lump sum or DCA?
Wow, you have accumulated a half million dollars in CDs. That must have taken some discipline.

Are you continuing to save? How much are you planning to add into the market regularly in addition to the CDs?

There's a psychological matter you have to address. You've heard the math. 2/3 of the time, it's better to put the money in all at once. The market will most likely climb from here, but it might not. 1/3 of the time, it will drop. Over the next 27 years (your investment time horizon), it is almost certainly going to increase.

The problem is, you're considering putting $500,000 in during a short period of time. If you're primarily in CDs now, and you're the kind of person to have an emergency fund of one year, it sounds like you're very risk adverse. You appear to be investing for the first time as well. This combination means the standard advice might not work, because you might not know what to expect if the markets turn rough.

Do you have a stable income? Does your spouse (if you have one - the 529 implies you have kids) also have an income? Are you conservative due to temperament or due to a variable or uncertain income stream?

What bond allocation are you considering? Have you mapped out what would happen if they equity portion dropped by half? Would you be okay with that? Intellectually, you may know that they'll recover, but the truth is, nobody knows what the markets will do. They may drop and stay down for a long time (like years, even decades). Are you going to feel worse off if you miss the equity portion doubling, or will you feel worse if it cuts in half?

I'd suggest putting the first $20,000 in all at once, to set up your asset allocations and hit all the minimums. I'd use an asset allocation of at least 50/50 stock/bond split until you have your first bear market (stocks drop by at least 20%). Your overall portfolio won't drop as much because your bond position won't be as volatile. That way you can find your sleep-at-night number. After the drop, you rebalance, selling sufficient bonds and buying equities to return your portfolio to the correct allocation. If you found 50/50 was too conservative, rebalance to a higher equity allocation at that time (and you'll have a better idea of your tolerance to losses.)

Meanwhile, just lump sum the additional funds in as the CDs mature. You're effectively moving the money in over two years anyways, so it's roughly the equivalent of an annual DCA period. The more conservative asset allocation should help mitigate the anxiety of investing at the wrong time. If you're continuing to invest additional money from other sources, I'd automate those contributions so you don't worry about timing. Just have them invest according to your asset allocation.

Rebalance overall once a year for simplicity.
dbr
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Re: Lump sum investment or DCA?

Post by dbr »

Sorry to violate my promise again.

The point is that the issue for the uncertain first time investor of a lot of money is not the irrelevant question of whether or not to "DCA." The relevant question is what is the long term investing plan, including deciding an appropriate asset allocation. There is nothing wrong with doing nothing while figuring these things out.
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