Author Topic: Biggest lump sum ever. What to do?  (Read 1703 times)

celticblue

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Biggest lump sum ever. What to do?
« on: June 05, 2018, 01:42:46 AM »
Hi Everyone,

I am selling my apartment at the end of June and moving into a paid off home.

I will have about $400,000 in proceeds to invest. Gulp. Nice problem to have but a cause of angst.

I am wary of marketing timing. I am aware that lump sums invested in the market tend to outperform drip feed ON AVERAGE. But I can't quite overcome the mental hurdle of being in the second longest ever economic expansion and market outperformance.

I am intending to immediately put proceeds in money market account. Ensure I have 2 years in expenses retained there to avoid selling stocks in a market drop (I am recently FIRE ) yay :) and then divide the remainder into 12 equal parts and feed into my vanguard VASGX over the next 12 months.

Anyone want to persuade me otherwise or reassure me? Trying to be open to wisdom as it will be the largest and last lump sum I ever receive

Thanks

 

mrmoonymartian

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Re: Biggest lump sum ever. What to do?
« Reply #1 on: June 05, 2018, 02:15:49 AM »
Luckily you don't need to invest in all those thousands of profitable businesses all at once if you're worried. There are plenty of other options available.

In 2004, Ashley Revell of London sold all of his possessions, clothing included, and placed his entire net worth of US$135,300 on red at the Plaza Hotel in Las Vegas. The ball landed on "Red 7" and Revell walked away with $270,600.

2Birds1Stone

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Re: Biggest lump sum ever. What to do?
« Reply #2 on: June 05, 2018, 02:19:46 AM »
Don't really care to persuade you, it's your money.

But the market could easily go up for another 12, 24, or 60 months before a "correction" happens.

Just treat the funds as you would the rest of your portfolio, and stick to your desired asset allocation.

Linea_Norway

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Re: Biggest lump sum ever. What to do?
« Reply #3 on: June 05, 2018, 03:55:59 AM »
I have been thinking about the same issue. If we sell our house and are going to rent for x time and later buying a house that costs 50% of our current house, we will also have a pretty large lump of money. That money is supposed to generate the required 7%. But as you can't predict the market, you never know when is a good moment to invest so much money into the stock market. That is why in general it is a good strategy to invest regularly over time.
I have been thinking about putting most of the lump sum in bonds and then gradually buy bulks of stock, like the OP suggested. Yes, that would miss out on a large market gain, but it is spreading risk. Also if the market goes down, you never know what will the bottom of the dip and when it is best to buy. Spreading also in that period might be a good idea.

I think I would not put the money to be used to buy our next house in the stock market. That is because I don't want it to be halved in value a year/a few years later when we need it. But the other 50% from the sale should be generating money.

rab-bit

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Re: Biggest lump sum ever. What to do?
« Reply #4 on: June 05, 2018, 05:11:53 AM »
I think a lot will depend on your time horizon for this money. If you will need this money in less than ~5 years, then I can understand your concern, but remember that over longer periods, the chances of a positive return from stocks is overwhelmingly positive:

http://awealthofcommonsense.com/2015/11/playing-the-probabilities/


Dicey

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Re: Biggest lump sum ever. What to do?
« Reply #5 on: June 05, 2018, 05:25:30 AM »
None of that 400k is taxable? How much of your nest egg does this amount represent?

terran

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Re: Biggest lump sum ever. What to do?
« Reply #6 on: June 05, 2018, 05:51:02 AM »
The statistically "right" answer is to put everything you plan to invest into the market right away. The next best thing is the self deception of dollar cost averaging. Get it into the market in the fastest way that still lets you sleep at night.

celticblue

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Re: Biggest lump sum ever. What to do?
« Reply #7 on: June 05, 2018, 07:50:33 AM »
Thanks everyone for your thoughts.

I know this is a personally emotional issue and I do find reassurance when people say just put it in the market as a lump sum if you are not looking to use it for 10 years or more (which is just about true as my current stash should last 10 years)

In answer to the questions , this is all tax free. It is about 200 in equity and 200 in gains, so I will not owe capital gains as it was my primary home.

boarder42

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Re: Biggest lump sum ever. What to do?
« Reply #8 on: June 05, 2018, 07:52:45 AM »
so i guess whats your planned SWR - is it 4% is it 3% where do you fall on that scale. 

celticblue

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Re: Biggest lump sum ever. What to do?
« Reply #9 on: June 05, 2018, 07:55:17 AM »
I forgot to mention I also have sequence of return risks on my mind. I just became FIRE recently so I had a notion in my head of gradually increasing the ratio of stocks to bonds in my portfolio over next 10 years. My historical asset allocation is 80:20 whereas if I put this lump sum in money market am guessing it will be more like 50-60 percent stocks.

My current withdrawal rate is closer to 3%

Jrr85

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Re: Biggest lump sum ever. What to do?
« Reply #10 on: June 05, 2018, 08:03:50 AM »
I forgot to mention I also have sequence of return risks on my mind. I just became FIRE recently so I had a notion in my head of gradually increasing the ratio of stocks to bonds in my portfolio over next 10 years. My historical asset allocation is 80:20 whereas if I put this lump sum in money market am guessing it will be more like 50-60 percent stocks.

My current withdrawal rate is closer to 3%

If your current withdrawal rate is close to 3% and you expect it to stay there, you can probably put it all in the market, as with that low of a withdrawal rate you can ride out a bad run. 

But since you are recently retired, you may want to look at posts on an equity glidepath at early retirement now. 

I think putting it in money markets and/or bonds, and then either living off of stock returns or money market/bond withdrawals depending on market performance for the next few years will actually reduce your downside risk while limiting your upside risk, which again, if you are already near a 3% withdrawal rate, you might not need to worry about. 

Laura33

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Re: Biggest lump sum ever. What to do?
« Reply #11 on: June 05, 2018, 08:12:04 AM »
Do you have a structured asset allocation/withdrawal plan for FIRE?  If so, just allocate the lump sum according to that.  If not, then there's your problem!

One option would be to do a bond/CD ladder that is long enough that you will no longer worry about losses in your equities, because you will have plenty of cash to ride out the drop in the market.  The length of the ladder is based on your risk tolerance -- most people I think do 3 or 5 years, but my FIL did 7 years.  Say 5 years for illustration purposes.  The basic idea is that you take what you need for the next 5 years' expenses, and you put 1 year's expenses into CDs or individual bonds with maturity dates in each of the next five years; then each year when those mature, you use that money to live on, and sell enough stocks to buy another bond 5 years out to keep the ladder going.  So say you need $30K/yr.  To get started, you would take $150K of that money and buy $30K of bonds maturing in 2019, $30K maturing in 2020, $30K maturing in 2020, $30K maturing in 2021, and $30K maturing in 2022.  When 2019 rolls around and you need the cash, your first set of bonds has matured, so you cash that in and live off of that money.  At the same time, you sell another $30K (or whatever figure you think you will need) of your stock investments and buy bonds maturing in 2023, so that every year you just keep the ladder rolling.

Why does this help with market volatility?  Because if the market crashes, you don't sell your investments to fund the ladder 5 years out.  Instead, you just let your investments ride and continue to live off your bond proceeds for however long the crash lasts.  And you don't have to worry, because you are fine for years!  Then when the market does eventually go back up, you can take some profits and replenish your bond ladder to cover those years that you missed.   

This is basically a psychological trick to manage fear of sequence of return risk.  There's no magic in it as an investment principle -- you are just using a little of your money as a safety blanket to calm your fears, so you can free your mind up to invest the remaining money in the market and treat that money logically, without freaking out about downturns. 

boarder42

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Re: Biggest lump sum ever. What to do?
« Reply #12 on: June 05, 2018, 08:13:34 AM »
I forgot to mention I also have sequence of return risks on my mind. I just became FIRE recently so I had a notion in my head of gradually increasing the ratio of stocks to bonds in my portfolio over next 10 years. My historical asset allocation is 80:20 whereas if I put this lump sum in money market am guessing it will be more like 50-60 percent stocks.

My current withdrawal rate is closer to 3%

i mean historically it doesnt really matter what you do with it then.  SORR has never effected a 3% SWR my personal choice in your situation would be to ignore SORR b/c you've already negated it due to over saving.  I personally would rather give more of my money to more people later in my life.  So i'd go all in 90/10 or greater on the stock side to try to make my money impact the world as much as possible.

Dicey

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Re: Biggest lump sum ever. What to do?
« Reply #13 on: June 05, 2018, 08:44:23 AM »
Great posts from @Laura33 and @boarder42. I specifically agree with b42's point about asset mix. I don't want to preserve what's left. I have enough. I want it to grow like hell so it can do some good in the world. I want to be amazed at what I have left for philanthropy when I get to the end of my days.

Also @lhamo made an excellent point about I-bonds on another thread that might be another creative way of laddering as Laura suggests.

terran

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Re: Biggest lump sum ever. What to do?
« Reply #14 on: June 05, 2018, 09:21:05 AM »
I forgot to mention I also have sequence of return risks on my mind. I just became FIRE recently so I had a notion in my head of gradually increasing the ratio of stocks to bonds in my portfolio over next 10 years. My historical asset allocation is 80:20 whereas if I put this lump sum in money market am guessing it will be more like 50-60 percent stocks.

My current withdrawal rate is closer to 3%

I find the "rising equity glidepath" concept more compelling personally. This would suggest that you should immediately (as soon as you've committed to retiring) go to 60:40 and then gradually shift to 100:0 over the next 10 years or so.

A couple of resources on the topic:

diffusate

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Re: Biggest lump sum ever. What to do?
« Reply #15 on: June 05, 2018, 10:31:14 AM »
I was in a similar situation with about the same amount of $ and decided to do a quick dca over just a few months, but compromised by putting 1/3 in right away. The short time horizon was less about big market swings and more about avoiding a single inflated day or week.

I'm about fully invested right now and have no regrets. I would have done slightly better by putting everything in at once, but that was just a bit too stressful. The nice thing is that I felt good about the initial lump sum when the markets went up and feel good about the dca when things went down.