Author Topic: Psychology of Lump Sum Investmenting - Why Is it So Hard?  (Read 5431 times)

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5622
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Psychology of Lump Sum Investmenting - Why Is it So Hard?
« on: June 15, 2016, 11:59:29 AM »
I doubt that I'm the only one who is hesitant to invest a large sum of money at any given time.

I have made some very poor investing decisions based on emotion that cost me tens of thousands of dollars over the past 5 years. Despite this knowledge and all of the supporting research that dictates time in the markets vs. timing the market I can't being myself to invest a recent windfall.

I generally consider myself a pretty logical fella, but in this instance I am paralyzed and unable to get myself to dump the cash sitting in my account into my desired AA.

Anyone else dealing with this issue? For those that were able to overcome this, what gave you the final nudge?

The way I justify holding on cash right now is.......VERY low inflation, election year which could mean a rollercoaster for the stock market, my employment is not the most secure and my income varies widely so I am naturally more risk averse. That and the thought of getting burned as I did in the past are enough to keep me from making the rational choice............grumble grumble.


tonysemail

  • Pencil Stache
  • ****
  • Posts: 725
  • Location: San Jose, CA
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #1 on: June 15, 2016, 12:08:14 PM »
i'm also struggling with it right now.
the market is volatile this year and that makes it so tempting to try my hand at market timing.

writing an IPS helped moderately.

tax loss harvesting helped take the sting out of buying into a high market.

plainjane

  • Handlebar Stache
  • *****
  • Posts: 1675
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #2 on: June 15, 2016, 12:36:45 PM »
I was in a similar situation a couple of years ago.  I broke the amount into 20 parts, and set up my system so it was invested automatically at every pay (along with my regular investments).

NoStacheOhio

  • Handlebar Stache
  • *****
  • Posts: 2143
  • Location: Cleveland
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #3 on: June 15, 2016, 12:37:29 PM »
Because humans inherently have a negativity bias. https://en.wikipedia.org/wiki/Negativity_bias

Couple that with our bias toward short-term thinking, and you have a recipe for massive anxiety in even the most rational person.

Losing money hurts more than making money feels good, and lump sum introduces a very real risk of short-term losses.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #4 on: June 15, 2016, 12:42:21 PM »
Not me. I'm so surrounded by opportunity that I can never accumulate cash. I could put at least a million to work right now in productive ways, in about as much time as it took to execute the transactions. Optimism is fucking awesome.

gluskap

  • Stubble
  • **
  • Posts: 169
  • Age: 40
  • Location: Los Angeles, CA
    • Money Savvy Mommy
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #5 on: June 15, 2016, 01:14:35 PM »
My advice is to dollar cost average it over a few months and set it up automatically so you don't think about it.  Then forget about it and come back in 20-30 years.  The reason you've made bad investing decisions as you've said is because of emotion.  And you're acting on that emotion now (fear of investing all at once).  Therefore take all of your emotion out of it.  It's hard to be emotional about things going on if you're not aware of it.  That's my set it and forget it mentality.  Of course this only works if you've got a long time frame for investing because in the short term there is a huge roller coaster ride but in the long term you will be up.  Could you have read a lot more and made better decisions and made more money?  Yeah sure you can always optimize.  But I find that simple strategies are easier to stick to and actually get something accomplished instead of indecision over exactly the best way to invest.  Just buy 100% VTSAX if you're not sure...it's diversified enough in my opinion that you'll be fine unless the US government collapses.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6728
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #6 on: June 15, 2016, 04:41:54 PM »
Anyone else dealing with this issue? For those that were able to overcome this, what gave you the final nudge?

I moved my old investments over from my financial adviser to my self-managed brokerage. I had over $200K to invest early in 2016.

It took me a few days to get it all into ETFs according to my AA.

Looking back 90% of my investments are up from that date 10% are down so waiting would have only had me miss out some price gains and 2 rounds of dividends [if you include this quarter].

Honestly I have forgotten about the whole thing until I read your thread. I do my best to invest each month whether markets are up or down. I don't often have big lump sums to deal with, but when I have I've got them invested in a short-ish time and not regretted it once.

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5622
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #7 on: June 15, 2016, 04:49:05 PM »
Anyone else dealing with this issue? For those that were able to overcome this, what gave you the final nudge?

I moved my old investments over from my financial adviser to my self-managed brokerage. I had over $200K to invest early in 2016.

It took me a few days to get it all into ETFs according to my AA.

Looking back 90% of my investments are up from that date 10% are down so waiting would have only had me miss out some price gains and 2 rounds of dividends [if you include this quarter].

Honestly I have forgotten about the whole thing until I read your thread. I do my best to invest each month whether markets are up or down. I don't often have big lump sums to deal with, but when I have I've got them invested in a short-ish time and not regretted it once.
We had a very nice correction earlier this year so you definitely made out well there. I'm one of those people who watches my investments daily and part of my job is to stay on top of markets/trends/financial news......makes it harder to set it and forget it. I too am investing every month to the tune of $1050 into my 401k and a $5500 Roth contribution every Jan 1st (regardless of market price.) This is the first time I've had to invest a windfall.

ender

  • Magnum Stache
  • ******
  • Posts: 4870
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #8 on: June 15, 2016, 05:01:16 PM »
We had a very nice correction earlier this year so you definitely made out well there. I'm one of those people who watches my investments daily and part of my job is to stay on top of markets/trends/financial news......makes it harder to set it and forget it. I too am investing every month to the tune of $1050 into my 401k and a $5500 Roth contribution every Jan 1st (regardless of market price.) This is the first time I've had to invest a windfall.

Set a goal to not look at your personal investments/net worth for a month straight.

I think that will help significantly.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4982
  • Age: 34
  • Location: Seattle, WA
    • My blog
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #9 on: June 15, 2016, 05:40:07 PM »
Would you feel the same if you were going to put less of that money into the stock market and more into bonds? If so, perhaps your target asset allocation doesn't match up with your actual risk tolerance very well and you'll need to make them match up better.

k9

  • Stubble
  • **
  • Posts: 241
  • Age: 39
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #10 on: June 16, 2016, 05:33:21 AM »
I would say that, if lump sum investing scares you, your AA might be a little too risky for your taste.

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5622
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #11 on: June 16, 2016, 08:43:18 AM »
A wholehearted thank you to everyone who responded in this thread.

I am putting in a limit order and tossing $10k into VTI/VXUS today.

shotgunwilly

  • Pencil Stache
  • ****
  • Posts: 547
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #12 on: June 16, 2016, 09:24:31 AM »
Quick mates.... PREPARE FOR CRASH!!!

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5622
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #13 on: June 16, 2016, 09:30:31 AM »
Quick mates.... PREPARE FOR CRASH!!!

100% LOL.......if my history is any indication of the future (hehehe) we will have a nice correction in the coming weeks!

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1771
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #14 on: June 16, 2016, 11:07:03 AM »
You've learned not to put all your money in one place, and here you are trying to overcome that.  I've read that most of the daily fluctuation of the markets go away when you pick two separate dates (weeks, months apart) and invest half on each date.  Most of the "wrong day" risk goes away with 2 dates, but you could certainly pick 3 or 4 dates if you're more comfortable investing 33% or 25% at a time.

No need to fight lump sum investing - just break the problem into smaller chunks.  Invest over a number of dates you select, and you'll lower the risk of a one day catastrophe and make it easier to do.

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5622
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #15 on: June 16, 2016, 12:18:47 PM »
You've learned not to put all your money in one place, and here you are trying to overcome that.  I've read that most of the daily fluctuation of the markets go away when you pick two separate dates (weeks, months apart) and invest half on each date.  Most of the "wrong day" risk goes away with 2 dates, but you could certainly pick 3 or 4 dates if you're more comfortable investing 33% or 25% at a time.

No need to fight lump sum investing - just break the problem into smaller chunks.  Invest over a number of dates you select, and you'll lower the risk of a one day catastrophe and make it easier to do.

Thank you! I dumped $5000 into VTI and $5000 into VTSAX a few hours ago. *fingers crossed*

dinkhelpneeded

  • 5 O'Clock Shadow
  • *
  • Posts: 75
    • Silicon Valley RE-FIRE
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #16 on: June 16, 2016, 12:18:57 PM »
Also this indicates to me that maybe you need a bigger emergency fund? Having some "more than enough" money sitting in a bank account can help to alleviate short term fears that you will somehow "need" the money that you just invested.

ZiziPB

  • Magnum Stache
  • ******
  • Posts: 3274
  • Location: The Other Side
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #17 on: June 16, 2016, 01:13:42 PM »
It will get easier if you do it more often :-)  By the time you invest your 3rd or 4th bonus, you'll think nothing of it.  At least that's how it was for me.  The first time I had a lump sum to invest a few years ago, it took me forever to work up my nerve to do.  Since then, I've done it every year when I get my bonus and RSUs vest.  It's become sort of automatic now: sell RSUs, transfer bonus money into brokerage account, check allocation to make sure that I'm still in balance, drop the money into the right buckets, DONE!

Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1536
  • Location: Canada
    • My Necronomicon of Badassity
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #18 on: June 17, 2016, 08:50:11 AM »
2Birds1Stone - You really need to read the following article.  It's the best thing I've ever read about investment psychology.   
http://www.moneysense.ca/invest/train-your-investing-brain/

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5622
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #19 on: June 17, 2016, 09:12:12 AM »
2Birds1Stone - You really need to read the following article.  It's the best thing I've ever read about investment psychology.   
http://www.moneysense.ca/invest/train-your-investing-brain/
Fantastic article, thank you for sharing!

humblefi

  • Stubble
  • **
  • Posts: 107
    • Humble FI
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #20 on: June 19, 2016, 09:49:10 AM »
I went through this myself and even after reading a few articles that lump sum investing was better in the long run, it was hard.
So, I decided on a two pronged approach of Dollar cost averaging: DCA1 (small regular amounts) and DCA2 (large, infrequent amounts)

DCA1: Small periodic investments
I spread my mutual investments into two parts for each mutual fund, and spread the investment across many non-overlapping days in the month. Since Vanguard does not charge me a fee to invest into mutual funds, I felt that this spread captured the market ups and downs better. For example,
    VCADX           9th and 28th
    VTMFX           6th and 27th
    etc

DCA2: Large investments....to simulate lump sum investing
I saw one more pattern in the  market. Market dips in the downward directions were followed by upswings the next couple of days. For example, if DOW dropped 300 points on one day, it is rare to have a similar drop on the next day as well i.e. consecutive market dips were rare. On the days the DOW (or S&P) dipped badly, there were opportunities to invest in my chosen high quality mutual funds at a lower price. When ever the DOW dropped enough (52 week lows, 300 points or more, etc), I pushed my money into one/many of my investments....if I had access to "lump sum" amounts of money, I would buy in big increments on the down days. For example, I use my tax refunds in this way. While I wait for down days, my money is waiting in a Money Market Fund OR a high interest online banking account.

More details here....https://humblefi.com/2015/12/22/dollar-cost-averaging-my-way/

This method has helped the psychology side for me while getting the benefits of lump sum investment. Hope that helps.

talltexan

  • Magnum Stache
  • ******
  • Posts: 2569
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #21 on: June 19, 2016, 07:57:09 PM »
My co-workers make fun of me for investing 100% of my 401k contributions into the same thing. They don't see me looking in once a month to change that thing to whichever of three options is worth the least.


Sent from my iPad using Tapatalk

GrumpyPenguin

  • Bristles
  • ***
  • Posts: 288
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #22 on: June 20, 2016, 08:54:32 AM »
I would say that, if lump sum investing scares you, your AA might be a little too risky for your taste.

A number of posters have said similar statements in this thread, but I disagree. 

The nature of my income involves primarily lump-sum quarterly payments and a bonus.  Every quarter I face a situation where I know I *should* just do lump-sum investing as soon as I get the income.  I am 100% happy with my asset allocation and emergency fund, but with market volatility, I also can't help but feel a bit anxious whenever I face the lump sum investing opportunity. 

It hurt a little to have invested a sizeable amount at the end of December, see the prices drop significantly in January and February where I could have gotten a significant bargain, only for prices to rebround again for the next couple of quarterly income lump-sums...  Yeah yeah, dollar cost averaging is what smooths that out, and that's exactly where some of the "time in the market" vs "timing the market" anxiety comes in.

DrF

  • Bristles
  • ***
  • Posts: 464
Re: Psychology of Lump Sum Investmenting - Why Is it So Hard?
« Reply #23 on: June 20, 2016, 09:39:48 AM »
I went through this myself and even after reading a few articles that lump sum investing was better in the long run, it was hard.
So, I decided on a two pronged approach of Dollar cost averaging: DCA1 (small regular amounts) and DCA2 (large, infrequent amounts)

DCA1: Small periodic investments
I spread my mutual investments into two parts for each mutual fund, and spread the investment across many non-overlapping days in the month. Since Vanguard does not charge me a fee to invest into mutual funds, I felt that this spread captured the market ups and downs better. For example,
    VCADX           9th and 28th
    VTMFX           6th and 27th
    etc

DCA2: Large investments....to simulate lump sum investing
I saw one more pattern in the  market. Market dips in the downward directions were followed by upswings the next couple of days. For example, if DOW dropped 300 points on one day, it is rare to have a similar drop on the next day as well i.e. consecutive market dips were rare. On the days the DOW (or S&P) dipped badly, there were opportunities to invest in my chosen high quality mutual funds at a lower price. When ever the DOW dropped enough (52 week lows, 300 points or more, etc), I pushed my money into one/many of my investments....if I had access to "lump sum" amounts of money, I would buy in big increments on the down days. For example, I use my tax refunds in this way. While I wait for down days, my money is waiting in a Money Market Fund OR a high interest online banking account.

More details here....https://humblefi.com/2015/12/22/dollar-cost-averaging-my-way/

This method has helped the psychology side for me while getting the benefits of lump sum investment. Hope that helps.

Why do you get enough of a tax refund for it to be considered "large lump sum"? My tax situation is that I get a refund or pay some tax owed in the $200-400 range. Hardly a windfall. Check your tax deductions and plan better.

To the OP, maybe once the 'stache is sufficiently larger than the money to be added the anxiety will lesson?