Author Topic: Still unsure about lump sum investing ...  (Read 1266 times)

AD700

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Still unsure about lump sum investing ...
« on: June 07, 2018, 05:40:39 AM »
Hi all,

I posted a few days ago about whether to throw my lump sum of 15k (I realised it was more than the 12k I originally posted) into an index fund or wait for a correction/crash. I am nervous about the value of equities at the moment and fully expect to quickly lose 20-60 per cent of the value of my investment if I buy at this point in time.

When exploring further, I came across this article. It suggests that lump-sum investing is the best strategy - except in the current market.

Thoughts?

https://www.bloomberg.com/view/articles/2018-04-18/lump-sum-investing-is-the-best-strategy-except-in-this-market


VoteCthulu

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Re: Still unsure about lump sum investing ...
« Reply #1 on: June 07, 2018, 07:38:20 AM »
The article says lump sum still wins 60% of the time in their arbitrary backtesting scenario, so why the continued doubt?

In practice, the best method is whichever one gets you to invest, if DCA makes you sleep better at night, go for it!

RWD

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Re: Still unsure about lump sum investing ...
« Reply #2 on: June 07, 2018, 07:44:44 AM »

RichMoose

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Re: Still unsure about lump sum investing ...
« Reply #3 on: June 07, 2018, 07:45:43 AM »
It is always difficult to invest a big chunk of money because of fear that you might be buying at the very peak of the market. The likelihood of that actually happening is low and I'm sure you understand that. However, it is important to jump in with something.

What is your overall allocation based on your investment policy? 60/40, 80/20?

Start with buying all of your bond allocation right away. Then, buy enough stocks to match the amount you buy in bonds. Then, add the rest of the stocks in a few more increments over the next year.

I might look like this if you are targeting 80/20...

Now- 20% bonds, 20% stocks, 60% cash
3 months - 20% bonds, 40% stocks, 40% cash
6 months - 20% bonds, 60% stocks, 20% cash
1 year - 20% bonds, 80% stocks, 0% cash

Hope this helps you take the first step.
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AD700

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Re: Still unsure about lump sum investing ...
« Reply #4 on: June 07, 2018, 10:02:42 AM »
Thanks for the replies.

I am aware of research and solid arguments about the benefits of lump-sum investing versus dollar cost averaging. However, I do think we are facing an unusual set of circumstances which gives me pause for second thought.

  • Quantitative easing has pumped huge amounts of money into equities and it is hard to find anyone who says that they are not highly priced. Most people will tell you they are at historic highs (not in terms of the value of the overall market, which I know hits 'all time highs' regularly,  but in terms of P/E ratio and other measures).
  • We are almost 10 years into a bull run
  • World politics are (arguably) as volatile as they have been since the end of the Cold War
  • Trump is a F**ing lunatic narcissist who is steadily undermining the pillars of democracy in the US and the international rules-based order more broadly



What is your overall allocation based on your investment policy? 60/40, 80/20?


My allocation is 90 % equities / 10 % bonds . This doesn't include the 15k cash, which I will put into something that generates returns. I am also in an unusual position (for me) of being able to save a large portion of my salary for the next 6-12 months (about 5k per month). So I will also have to think about how to invest this. My concern is that I may end up putting a large proportion of my NW into investments at the peak of a huge bull market and then have to sit and wait for a decade to see any returns.

I am not concerned about getting cold feet and selling. As far as I am concerned, once an investment is made the money disappears. 

theolympians

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Re: Still unsure about lump sum investing ...
« Reply #5 on: June 07, 2018, 12:15:07 PM »
Thanks for the replies.

I am aware of research and solid arguments about the benefits of lump-sum investing versus dollar cost averaging. However, I do think we are facing an unusual set of circumstances which gives me pause for second thought.

  • Quantitative easing has pumped huge amounts of money into equities and it is hard to find anyone who says that they are not highly priced. Most people will tell you they are at historic highs (not in terms of the value of the overall market, which I know hits 'all time highs' regularly,  but in terms of P/E ratio and other measures).
  • We are almost 10 years into a bull run
  • World politics are (arguably) as volatile as they have been since the end of the Cold War
  • Trump is a F**ing lunatic narcissist who is steadily undermining the pillars of democracy in the US and the international rules-based order more broadly

** I believe QE ended. Whatever negative effect that would have had should have occurred by now.
** As to the run, it could be said we are still coming out of the hole from the 2008 crash.
** "World politics" can always be said to be rough. Think of all the rough patches we had pre-crash: collapse of the eastern block, wars in Chechnyna, doomsday cults, explosion of international terrorism. Even the period of the cold war was crazy, wirth nuclear annihilation hanging over everyone's head. Things could be said to be tame now. Syria/Iraq winding down, Ukraine/Russia staying in their corners, a meet with NK on the way (that is huge!). Even during the cold war the financial sector grew. Don't let this period we are living in bias you.
** Don't know what to say about the Trump stuff except that you should keep politics/personal feelings about specific politicians not sway you too much. If you took all of your money out of the market the day day before he won the presidency you would have lost a boat load of returns. Much the same for most periods in history.


What is your overall allocation based on your investment policy? 60/40, 80/20?


My allocation is 90 % equities / 10 % bonds . This doesn't include the 15k cash, which I will put into something that generates returns. I am also in an unusual position (for me) of being able to save a large portion of my salary for the next 6-12 months (about 5k per month). So I will also have to think about how to invest this. My concern is that I may end up putting a large proportion of my NW into investments at the peak of a huge bull market and then have to sit and wait for a decade to see any returns.

I am not concerned about getting cold feet and selling. As far as I am concerned, once an investment is made the money disappears.

jacoavluha

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Re: Still unsure about lump sum investing ...
« Reply #6 on: June 07, 2018, 12:32:01 PM »
no way to know what will happen. Warren Buffet likes dollar cost averaging.

Radagast

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Re: Still unsure about lump sum investing ...
« Reply #7 on: June 07, 2018, 02:03:25 PM »
Lets say you are tying to amass $1.5 million. Then $15,000 is 1% of what you are concerned about. If for some reason things go bad and you temporarily lose 50%, that will be an 0.5% temporary loss. It will quickly vanish into the mists of time. You are already going to be making larger than normal contributions over the next year, so dollar cost averaging would be redundant. Just invest it already.

Maybe you need a better asset allocation if you are that nervous. Consider 45% US, 30% international, 25% bonds. Or even 40% US, 30% international, 20% bonds, 10% gold. Anything to get you started.

  • Quantitative easing has pumped huge amounts of money into equities and it is hard to find anyone who says that they are not highly priced. Most people will tell you they are at historic highs (not in terms of the value of the overall market, which I know hits 'all time highs' regularly,  but in terms of P/E ratio and other measures).
  • We are almost 10 years into a bull run
  • World politics are (arguably) as volatile as they have been since the end of the Cold War
  • Trump is a F**ing lunatic narcissist who is steadily undermining the pillars of democracy in the US and the international rules-based order more broadly
Great insights! You should be a senior analyst for Goldman Sachs.

catccc

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Re: Still unsure about lump sum investing ...
« Reply #8 on: June 07, 2018, 03:58:09 PM »
In 2014, markets were doing well and I didn't look, but I bet if I did, I would have found an article saying the same thing, 'don't lump sum now.'  But based on the statistics, I went ahead and did it, to the tune of $120K.  I had been saving cash for about 11 years and just sitting on it in "High" yield savings accounts and CDs.  It was meant to be for an eventual house purchase.  To this day we still rent, and I'm glad I invested when I did.  My only regret is not having done it sooner.

IDK where you are in your FIRE journey, but if retirement isn't right around the corner, I say throw it in.  Someone else here once said "the market is always at an all time high."  Obviously that is not true and we have had dips, but generally speaking, it does tends to go in one direction.

DH and I are currently socking away over $5K a month, plus we lump sum $11K every January on top of that.  Our rule for investing is always sooner than later.  You may be right that you'd be better off DCAing in, but you might not.  Either way, just set a standard and go with it, that way you don't need to think too hard.  Yes, that's right, my investment strategy might center around not having to think too hard...  Good luck and be glad you are in a position to invest such a sum!

Eric

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Re: Still unsure about lump sum investing ...
« Reply #9 on: June 07, 2018, 04:21:24 PM »
Lets say you are tying to amass $1.5 million. Then $15,000 is 1% of what you are concerned about. If for some reason things go bad and you temporarily lose 50%, that will be an 0.5% temporary loss. It will quickly vanish into the mists of time. You are already going to be making larger than normal contributions over the next year, so dollar cost averaging would be redundant. Just invest it already.

Yeah, OP.  $15k is nothing in the grand scheme of things.  Of course if feels like a lot right now, but in a few years you'll laugh at this hesitation.  Just invest it already.
"Compound interest is the most powerful force in the universe."  -- Einstein

Rob_bob

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Re: Still unsure about lump sum investing ...
« Reply #10 on: June 07, 2018, 08:26:54 PM »
Maybe you should lump sum $10k and keep $5k cash if that makes you more comfortable.

How would you feel if you kept it all in cash and watched the market creep higher over the next 5 years while your cash erodes by a few % each year from rising inflation?  How would you feel about investing it at those higher levels?

How many people sold out just short of the market bottom in 2009 and are still out of the market because they know it will crash again, and most likely still be at a higher level than they sold at?

You should determine what % of your portfolio should be cash/fixed income then invest accordingly.

MDM

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Re: Still unsure about lump sum investing ...
« Reply #11 on: June 07, 2018, 08:32:01 PM »
My concern is that I may end up putting a large proportion of my NW into investments at the peak of a huge bull market and then have to sit and wait for a decade to see any returns.
If you DCA the $15K, and the market is still high, will you then withdraw it all and DCA the whole thing back in?

talltexan

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Re: Still unsure about lump sum investing ...
« Reply #12 on: June 08, 2018, 08:25:51 AM »
We all thought Trump was a lunatic before he was elected. Then--within hours of him winning--the stock market turned around and it's been screaming higher ever since. He's a lunatic, but he's a pro-business lunatic.

If you think Trump will be an ineffective President, increase your allocation to international. My Roth IRA is 50-50 domestic and international.

FIRE@50

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Re: Still unsure about lump sum investing ...
« Reply #13 on: June 08, 2018, 08:38:33 AM »
We all thought Trump was a lunatic before he was elected. Then--within hours of him winning--the stock market turned around and it's been screaming higher ever since. He's a lunatic, but he's a pro-business lunatic.

If you think Trump will be an ineffective President, increase your allocation to international. My Roth IRA is 50-50 domestic and international.

I understand your sentiment, but I think there are a couple lessons to be learned here. The potus doesn't actually control the economy. When things are good they get/take way to much credit and when things are bad, the get way too much blame. Also, the stock market isn't the economy. They don't move in lockstep. In theory, the stock market is forward looking. I've yet to find anyone that can predict the future. Lastly, labeling someone as pro-business doesn't mean that their policies IF implemented will actually be good for business. Institutionalized bigotry, trade wars, endless actual wars, and fear mongering are absolutely not good for business despite what many ignorant voters might believe.

Back on topic, I vote for lump sum.

OurTown

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Re: Still unsure about lump sum investing ...
« Reply #14 on: June 08, 2018, 10:23:38 AM »
If he nukes somebody, that will have a negative impact on the economy. 

toganet

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Re: Still unsure about lump sum investing ...
« Reply #15 on: June 08, 2018, 11:18:11 AM »
Back on topic, my plan when I roll over my 401(k) here in a month or so will be to lump-sum proportionally into my rollover IRA based on my current AA, as if it were new money.  The rollover happens to be close in time to my quarterly rebalance, so I'm going to try to kill two birds with one stone.

MustacheAndaHalf

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Re: Still unsure about lump sum investing ...
« Reply #16 on: June 08, 2018, 08:33:03 PM »
I am not concerned about getting cold feet and selling. As far as I am concerned, once an investment is made the money disappears.
Can you tell the difference between someone who gets cold feet, sells, and has 100% cash.. and sitting in 100% cash?  Seems like the result is the same - you're 100% in cash.  That cash might earn 1%/year, while portfoliovisualizer.org shows that the US stock market has averaged 11.5% from 1978-now (~40 years).  Several crashes are included in that, too.

Pick an amount you're comfortable investing and invest it.  Maybe $3k or $5k and buy a total stock market fund, to avoid being 100% in cash.  Then a week or month later, try it again.  Most of the market volatility is removed by buying on two separate days.

Predicting a crash isn't enough: you have to know the depth of the crash.  If the market crashes 10% and recovers, you missed it.  But if you buy in, and the crash deepens to -30%, you took an additional loss.  Timing a crash is as tricky as predicting one in the first place.  If a highly paid fund manager could do it, they'd beat the S&P 500.  But instead, 80% (3 year) to 90% (10 year) of large cap funds do worse than the S&P 500 index.


PDXTabs

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Re: Still unsure about lump sum investing ...
« Reply #17 on: June 09, 2018, 12:15:31 AM »
I understand your fear of the US economy faltering, possibly through politics. It would have been bad to lump sum invest right before the 1929 crash. It would also have been bad to sell everything after Greenspan's Irrational exuberance speech. I try to balance this risk by investing in the world stock market, not just the US. Specifically, I really like VTWSX.
« Last Edit: June 09, 2018, 10:30:27 AM by PDXTabs »

doneby35

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Re: Still unsure about lump sum investing ...
« Reply #18 on: June 09, 2018, 07:39:31 PM »
I put in a lump sum of 60k in VTSAX late january, a few days later, the market was down 10%. I was a little pissed at first, of course that would happen to me.... but in the end, you will be just fine.

talltexan

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Re: Still unsure about lump sum investing ...
« Reply #19 on: June 11, 2018, 08:29:09 AM »
We all thought Trump was a lunatic before he was elected. Then--within hours of him winning--the stock market turned around and it's been screaming higher ever since. He's a lunatic, but he's a pro-business lunatic.

If you think Trump will be an ineffective President, increase your allocation to international. My Roth IRA is 50-50 domestic and international.

I understand your sentiment, but I think there are a couple lessons to be learned here. The potus doesn't actually control the economy. When things are good they get/take way to much credit and when things are bad, the get way too much blame. Also, the stock market isn't the economy. They don't move in lockstep. In theory, the stock market is forward looking. I've yet to find anyone that can predict the future. Lastly, labeling someone as pro-business doesn't mean that their policies IF implemented will actually be good for business. Institutionalized bigotry, trade wars, endless actual wars, and fear mongering are absolutely not good for business despite what many ignorant voters might believe.

Back on topic, I vote for lump sum.

This is a good post. When I refer to Trump as "pro-business", I do not mean better for society.

I mean appointing regulators who will favor businesses--particularly ones that put effort into pleasing the President--over consumers or other stakeholders. But I think the stock market appreciation shows this, largely, as it merely represents the stream of profits of these companies.

frugalnacho

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Re: Still unsure about lump sum investing ...
« Reply #20 on: June 11, 2018, 09:15:43 AM »
$15k is nothing.  I've had swings of $15k in a single day, and many here have had much much larger swings.  You're over thinking it, just invest it and stop thinking about it.

Also this forum is littered with similar posts for the last 4 years about people being scared of investing "at the top".  Those people that DCA in, or didn't invest at all because they were certain they were going to immediately lose 20-60% of their investment, they all lost a lot of money (by not getting any gains) over the last 4 years.   

I don't know what the market is doing in the next 6 months or year. It might continue to go up.  It might go down.  Or it might stay the same.  But over my investing horizon (my entire life, so hopefully another 60 years) the market will definitely go up and I've got several hundred thousand invested because I believe that.