Author Topic: Plow 1 Million into market - do big numbers defy conventional wisdom?  (Read 2920 times)

Redhotdog

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I sit on 1 M USD in cash after selling our crazy expensive home. So what to do now?

I realize the conventional MMM wisdom is to invest it all at once into the stock market as nobody can time the market. My question here is if some pretty crazy financial numbers somehow push this in one direction or another. To give you some context I will list a few stats here without doing a full detailed case study (I list rounded numbers, but got full-fletch Excel model)

Net Worth 2.4M USD, of which 1M USD in cash right now. (plus 700k post-tax ETFs, 200k company RSUs, 500k pension funds & annuities)
Saving rate 500k USD per year (70%+ post tax savings rate plus tax-deferred contribution on top)
Spending level 100k USD per year, incl 50k USD for rent in crazy HLOC area which will go away in retirement

If I assume 100k USD in return on investments in my model (so assuming we now plow the 1M into the market) our financial plan looks like this (year-end):

2018: 2.5M USD- officially FI
2019: 3.1M USD
2020: 3.7M USD
2021: 4.3M USD
2022: 5.0M USD - time to declare victory and retire

In retirement we plan to live on 100k USD and have a rolling cash cushion of 500k so that we dont have to dip into our stocks when the market heads south. So back to my original question - are we better off establishing this cash cushion now - and hence only invest 500k - or are we better off going all in - knowing we are in (maybe at the end of) a 9 year bull market? The 500k in cash/cash equivalent could serve as dry powder should we get a dip before 2022. And how do you see the numbers in my case change this in favor of one or the other?

« Last Edit: August 05, 2018, 02:36:08 AM by Redhotdog »

marty998

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #1 on: August 05, 2018, 04:41:23 AM »
You save 500k a year?

Pretty obvious you can dump your $1m into the markets now and basically regain your cash cushion by this time next year no?

Even still, $500k has to be the biggest emergency fund I've ever seen here. People FIRE on less capital than that.

Are you on the right forum?

gpyros85

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #2 on: August 05, 2018, 05:06:58 AM »
Does this 1 million cover your capital gain taxes on the house? Also, at this point I would dollar cost into the market. Say 83k/month over the next year.

sokoloff

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #3 on: August 05, 2018, 05:45:38 AM »
I’d put it all in the market now.

I look at it this way: you have two years’ of savings in cash now and are wondering what to do. Pop it in over the next 4-8 weeks and continue to invest the additional savings according to the same allocation you’ve chosen. If you have kids, I’d bias heavily towards equities as with your stated figures, you’re saving for their lifetime, not yours, (Yours is already a lock, basically, assuming you can save $500K post-tax for each of the next 5 years.) If you don’t have kids (or don’t want to give them meaningful money), I still say stay fairly equity-weighted, but then figure out what you want the rest of the money to be used for. You’re likely to have many years of relative surplus (over the $100K projected spending). I wouldn’t keep such a large cash position. Consider trimming that to $200K or so and creating a bond or CD ladder that you use for your “fortress of solitude” SHtF money. With $5MM in the market, you’re likely to cash over $75K/yr in dividend checks anyway, so you really need very little supplemental to avoid having to sell in a down market.

You’re well on pace to win the game in crushing fashion. First, shore up the next five years of high savings (including managing taxes over that span). Then, plot of out how little cash cushion you’re comfortable with and trim towards that outcome. For you, making sure you get that $2.5MM invested is more important than whether you put the existing $1MM in now or over the next 3 years.

Redhotdog

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #4 on: August 05, 2018, 06:33:22 AM »
Thanks for the input thus far, appreciated!

gpyro85, yes this is post-tax, true dry powder cash which I could deploy - right now

marty998, it is not really 500k as emergeny fund, my question is the value of 500k as cash cushion vs putting into market given 500k saving per year (yes that is the true and real number). My question is if to make the 5 year cash cushion/ dry powder now or later for retirement.
Am I on the right forum? Well, not discovering MMM and we likely would have kept our 1.6M USD home - while aggressive paying down the prinical at 60 kUSD/year, worked a decade longer while increasing our spending at the tune of career advancement. And get a Porsche 911 (which I still drool over, childhood dream, alas!). We live well but waaaay below our means and fellow Executives standard. We are really just normal people with high incomes. One car, bought used and 7 years oid. And so on and so on. For me MMM is about a mindset - cutting waste, mindful spending and fulfilling your retirement goals much sooner than the conventional thinking.

sokoloff, yes we have one child (who has no idea what money we make). How do you see our saving rate/ situation affect the advice to plow into market now, if at all? There is a risk/reward here, getting all in should - on average - give 5-7% return but with market so high do I pay the opportunity cost of picking up a drop in the market.

Am I overthinking this?



 

« Last Edit: August 05, 2018, 06:38:36 AM by Redhotdog »

reeshau

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #5 on: August 05, 2018, 06:44:12 AM »
Net Worth 2.4M USD, of which 1M USD in cash right now. (plus 700k post-tax ETFs, 200k company RSUs, 500k pension funds & annuities)
Saving rate 500k USD per year (70%+ post tax savings rate plus tax-deferred contribution on top)
Spending level 100k USD per year, incl 50k USD for rent in crazy HLOC area which will go away in retirement

Sorry, but these numbers just don't add up.  Advice given on bad numbers will be bad advice.  Garbage in, garbage out.

If $500k is a 70% post-tax savings rate, then you net $714k.  You do say 70%+, but didn't say 75%.  So let's go with 75% to be safe.  You then would net $666k.  But, you state that you live on $100k.  So, where did the other $66k go?

You are saving $500k per year, but have a net worth of $2.4M.  So, you have been working at this position for...5 years?  It's possible, granted.  But not common at all.  (Admittedly, I did take the mental shortcut that rent = old mortgage interest + taxes.  You just cashed out your house investment, and commented on your rent payment)

RWD

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sol

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #7 on: August 05, 2018, 08:29:57 AM »
Whenever I hear one of these "should I invest it now or DCA it" threads, I sort of have to shake my head. 

You ARE invested, in cash.  Everyone who has assets of any type is "invested".  You currently have an asset allocation that is at least 41% cash, plus another 20% in pension/annuities, plus who-knows-what in your taxable brokerage account.  So your current investment mix is at least 61% cash/bonds/tbills, and at most 39% equities of any sort.  That's pretty darn conservative.

Is that your preferred asset allocation?  If it is, then congratulations you're done!  If it's not, then it's time to rebalance.  Do you think it makes sense to rebalance slowly, or do you rebalance all at once?  Do you also wash some of the dishes and save some for later?  Do you mow part of your lawn?

Most people rebalance annually or quarterly, but they do it all at once whenever they do it.  I don't see any advantage in deliberately choosing to NOT achieve your desired asset allocation. 

So stop thinking about it in terms of "should I wait or should I go" and start thinking about it in terms of modifying your current (IMO crappy) asset allocation to something you're more comfortable with.  Get to where you want to be as quickly as possible.  If you're not comfortable going 100% vtsax then choose something more conservative than that, but then get there immediately.


sokoloff

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #8 on: August 05, 2018, 10:43:39 AM »
sokoloff, yes we have one child (who has no idea what money we make). How do you see our saving rate/ situation affect the advice to plow into market now, if at all? There is a risk/reward here, getting all in should - on average - give 5-7% return but with market so high do I pay the opportunity cost of picking up a drop in the market.

Am I overthinking this?
Probably overthinking it.

Your high ratio of projected assets to spending and having a kid suggests to invest for their lifetime/lifespan, not yours. That means equities bias.

Your expenses are likely mostly covered by dividends at 2% and a little SS income. That means equities bias.

Your high savings rate means to me that any downturn in the next 5 years is a buying op you can take advantage of. That means equities bias.

The only thing that gives me pause is that you’re asking the question. That suggests you are not comfortable with my point of view that the equities market tends to be in equilibrium. That it has risen substantially (but not parabolicly) is not a reason to think that it’s due to fall. If it falls 15% the day after you finish investing, will you (correctly) ignore that and stay the course/keep investing? If not, you have a problem with my near 100% equities allocation and need to figure something else out.

ysette9

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #9 on: August 05, 2018, 01:49:17 PM »
Can you explain why you are essentially FI now but want to work for another five years? If you have enough, what does Enough*2 get you in terms of quality of life?

I like Sol’s description of how to think about your current asset allocation. The Vanguard white paper shows that lump sum investing will win in about 60% of the cases, so you are basically gambling with the odds highly in your favor if you go that route.

FirePassenger

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #10 on: August 06, 2018, 04:22:39 PM »
For context, I make close to you with a very similar net worth. I've only been making this much for ~4 years. My expenses are higher, close to 150k/yr. I also lost my job in 2009 so I'm extra paranoid. I am in the process of being 'managed out' of my current position as well. So super extra paranoid. I do have another offer in hand. Took me ~3 months to find one.

So here's what I would do:

1) Create an extra-peace-of-mind emergency fund. For me that is 2+ year of expenses in cash. That leaves you with 800k.
2) Invest 600k in an index fund. 200k in REITs or alternate investments.
3) Don't worry about it.

#3 is the most important one out of these. Why? Lets say there was a big market correction. Your portfolio falls by 25%. Unlike a lot of people that would have to work many years to recoup that if this happened to them immediately after retirement, it would take you just 1 year. Also, you're (very) gainfully employed and plan on working for another ~5 years.

Now most of your portfolio is already invested. You're talking about a 25% dip on 800k. That's $200k. ~4 months of additional work to recover.

The reason I added info about how long it took me to find another offer? That's super important. In my field (Tech Leadership), it can take anywhere from 3 months to a year to find the right role. Therefore, the extra large emergency fund.


Now if you're waiting for some black swan event where the market crashes by 50%, you lose your job simultaneously, can't find another job in a year etc, well...

AccidentalMiser

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #11 on: August 06, 2018, 04:44:26 PM »
Can you explain why you are essentially FI now but want to work for another five years? If you have enough, what does Enough*2 get you in terms of quality of life?

I like Sol’s description of how to think about your current asset allocation. The Vanguard white paper shows that lump sum investing will win in about 60% of the cases, so you are basically gambling with the odds highly in your favor if you go that route.

This.  If you think you need 5M to retire, you might not be on the right forum.  I would retire yesterday with your current numbers and live happily and comfortably forever.

Where do you live and what do you do, if you don't mind my asking?

Redhotdog

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #12 on: August 06, 2018, 11:42:53 PM »
Firepassenger, thanks a lot, it more or less is the same scenario I arrived at. I may add that we are dual high earners and we are not overly concerned about at least my job security (highest earner). But yes, still companies are taken over, split up or hit by Kodak-moments.. you never know.

A couple of people has asked why we need 5 M to retire and why not just quit tomorrow. I guess that makes sense if you hate your job - we dont. We actually love what we do, it gives us lots of purpose and even some pleasure. We are FI essentially now but not ready for RE. It is not just about finances but also having a life/family situation that lines up with not working anymore. We have a child who still goes to school, so some sort of stability and proximity is required. We wish to camp/hike/slow travel in retirement. Easier to do as empty-nesters. Retiring now to do what?
« Last Edit: August 07, 2018, 12:16:16 AM by Redhotdog »

sokoloff

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #13 on: August 07, 2018, 05:46:45 AM »
A couple of people has asked why we need 5 M to retire and why not just quit tomorrow. I guess that makes sense if you hate your job - we dont. We actually love what we do, it gives us lots of purpose and even some pleasure. We are FI essentially now but not ready for RE. It is not just about finances but also having a life/family situation that lines up with not working anymore. We have a child who still goes to school, so some sort of stability and proximity is required. We wish to camp/hike/slow travel in retirement. Easier to do as empty-nesters. Retiring now to do what?
Stay the course. I understand, as we're in a similar situation. We're more than bare-bones FI now, but I love my job and our kids are going into 2nd and 4th grade, so we're not exactly free to travel the world anyway, so with a high-paying job I like, might as well keep stacking the Benjamins...

AccidentalMiser

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #14 on: August 07, 2018, 10:56:30 AM »
Firepassenger, thanks a lot, it more or less is the same scenario I arrived at. I may add that we are dual high earners and we are not overly concerned about at least my job security (highest earner). But yes, still companies are taken over, split up or hit by Kodak-moments.. you never know.

A couple of people has asked why we need 5 M to retire and why not just quit tomorrow. I guess that makes sense if you hate your job - we dont. We actually love what we do, it gives us lots of purpose and even some pleasure. We are FI essentially now but not ready for RE. It is not just about finances but also having a life/family situation that lines up with not working anymore. We have a child who still goes to school, so some sort of stability and proximity is required. We wish to camp/hike/slow travel in retirement. Easier to do as empty-nesters. Retiring now to do what?

Fair enough.  If you're FI, then you don't need to overthink things.  If you love your jobs, so much the better!  One thing I would not do is sit on a million dollar pile of cash wondering when to invest.  You can't buy a crystal ball at any price.  Make an investment plan and get that money working for you.  Like @sol said, cash is an asset class and you're currently way overcommitted to that particular asset class. 

Jrr85

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #15 on: August 07, 2018, 12:15:57 PM »
I sit on 1 M USD in cash after selling our crazy expensive home. So what to do now?

I realize the conventional MMM wisdom is to invest it all at once into the stock market as nobody can time the market. My question here is if some pretty crazy financial numbers somehow push this in one direction or another. To give you some context I will list a few stats here without doing a full detailed case study (I list rounded numbers, but got full-fletch Excel model)

Net Worth 2.4M USD, of which 1M USD in cash right now. (plus 700k post-tax ETFs, 200k company RSUs, 500k pension funds & annuities)
Saving rate 500k USD per year (70%+ post tax savings rate plus tax-deferred contribution on top)
Spending level 100k USD per year, incl 50k USD for rent in crazy HLOC area which will go away in retirement

If I assume 100k USD in return on investments in my model (so assuming we now plow the 1M into the market) our financial plan looks like this (year-end):

2018: 2.5M USD- officially FI
2019: 3.1M USD
2020: 3.7M USD
2021: 4.3M USD
2022: 5.0M USD - time to declare victory and retire

In retirement we plan to live on 100k USD and have a rolling cash cushion of 500k so that we dont have to dip into our stocks when the market heads south. So back to my original question - are we better off establishing this cash cushion now - and hence only invest 500k - or are we better off going all in - knowing we are in (maybe at the end of) a 9 year bull market? The 500k in cash/cash equivalent could serve as dry powder should we get a dip before 2022. And how do you see the numbers in my case change this in favor of one or the other?

I would probably dollar cost average it in, even though that mathematically isn't "correct" simply because of the long run we've been on. 

However, I would not keep a $500k cash cushion in retirement with a $5M portfolio and a $100k annual spend.  At that point, you can almost live strictly off dividends from a S&P 500 index fund.  If anything, I'd put $100k aside in cash just so I wouldn't be forced to sell stock in an emergency that might arise in a down market, and that'd leave you a portfolio of $4.9M in stocks to manage $100k in spending.  Say you generate $120k in income to have $100k after tax (which I think is pretty conservative), then you're talking an under 2.5% withdrawal rate, which will not only give basically as much of a guarantee as there is that you will not run out of money, makes it extremely likely that your assets will continue to grow through retirement. 

Much Fishing to Do

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #16 on: September 04, 2018, 11:33:55 AM »
Given the size of your equity investments, and the fact bonds are likely to fall in price in the near future, and MMs are now making 2%, I don't think having $500k in cash is ridiculous in any way.  Its obviously being very conservative, but given you are talking about spending $100k/year after accumulating $5M you are very conservative and can easily get away with investing as such.

But I don't believe, given you feel you would consider a cash cushion of $500k now, that you would use that $500k as dry powder on a big dip, I would suspect when that time comes you would be happy you had that cash cushion and hang on tight to it until better times return, which again would be fine.  Why take any risk to push your 2% SWR down any further

MoneyStacher

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #17 on: September 04, 2018, 06:42:20 PM »
Whenever I hear one of these "should I invest it now or DCA it" threads, I sort of have to shake my head. 

You ARE invested, in cash.  Everyone who has assets of any type is "invested".  You currently have an asset allocation that is at least 41% cash, plus another 20% in pension/annuities, plus who-knows-what in your taxable brokerage account.  So your current investment mix is at least 61% cash/bonds/tbills, and at most 39% equities of any sort.  That's pretty darn conservative.

Is that your preferred asset allocation?  If it is, then congratulations you're done!  If it's not, then it's time to rebalance.  Do you think it makes sense to rebalance slowly, or do you rebalance all at once?  Do you also wash some of the dishes and save some for later?  Do you mow part of your lawn?

Most people rebalance annually or quarterly, but they do it all at once whenever they do it.  I don't see any advantage in deliberately choosing to NOT achieve your desired asset allocation. 

So stop thinking about it in terms of "should I wait or should I go" and start thinking about it in terms of modifying your current (IMO crappy) asset allocation to something you're more comfortable with.  Get to where you want to be as quickly as possible.  If you're not comfortable going 100% vtsax then choose something more conservative than that, but then get there immediately.

Great response. Lawn and dish analogies totally not needed. This is as solid an analysis and advice as you are going to get IMO.

ysette9

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #18 on: September 04, 2018, 08:59:39 PM »
I actually find the dish and lawn analogies to be very helpful in illustrating the dissonance. Personally I felt like my financial education extolled the virtues of Dollar Cost Averaging as though it was the cat's miao. I ended up having this impression that it spread out risk over time versus lump-sum investing. It didn't occur to me early in my career that lump sum investing wasn't really an option as I didn't have any money, except my paychecks coming in.

Reflecting on it now that I am older and wiser, I realize I completely missed the real lessons of Dollar Cost Averaging. DCA is the best when your money is coming in in dribbles over time, i.e. in the form of paychecks. In this scenario DCA is great, but these are the actual lessons it is trying to impart:
  • Invest as soon as you have money available ("time in the market, not market timing")
  • View market downturns as opportunities to buy more shares for the same $ value ("don't time the market")
  • Automate your investing ("don't time the market")

Now that I have a deeper appreciation for how investing works and after reading the Vanguard white paper on lump-sum versus DCA a chunk of money, I always invest any chunk of money that falls into my lap in one fell swoop, no matter how much. We do take our time to talk about our goals and how exactly to invest it, but once the decision is made, there is no putzing around.

Laura33

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Re: Plow 1 Million into market - do big numbers defy conventional wisdom?
« Reply #19 on: September 05, 2018, 10:31:53 AM »
Well, there's the math answer and the emotions answer.

The math answer is precisely what Sol said.  Do that.

The emotional answer is why you asked the question in the first place -- because, really, if you were 100% comfortable with the math answer, you wouldn't have written in, would you?

The really, really good news is that this is basically irrelevant for you, isn't it?  You don't have to optimize your investments perfectly to be able to FIRE; you have a ton of money invested already, and you make a shitload of money at jobs you don't want to quit, so you can screw up completely and be just fine.  So what do you want to do?  Want to treat it as play money and keep it on the side to invest on the next dip?  Ok; as long as you recognize that you might lose out on another decade of growth, that's your decision.  Want to bite your tongue and follow Sol's advice?  Great!  Just make sure you won't bail or kick yourself whenever the market does dip.

Personally, I'd probably split the difference -- take the majority of the cash and do what I know I'm supposed to do with it, but then take a portion and set it aside as "play" money to scratch my market-timing itch.  It's not optimal mathematically -- but if setting a bit aside helps you manage your emotions so you can do the mathematically optimal thing with the rest of it, that's still a win in my book.