Author Topic: Investing a Big Chunk During a Boom?  (Read 4825 times)

JGB

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Investing a Big Chunk During a Boom?
« on: May 09, 2013, 12:19:15 PM »
MMM's latest article had some pretty good timing for me, as it represents a number of thoughts that were already ruling around in my head. The timing of the latest economic boom, on the other hand is a bit unfortunate, as an attempt to make it in a software startup forced me to have a large chunk of my stash sitting in cash. That is over now, and I am ready to start investing it, but I have a lot of uncertainty about where to invest.

So far, the bulk of my retirement is in a TSP (basically a 401k) from my pre-startup days. That is in a mix of their fund options, dominated heavily by stock-based funds. I also have a bit in stocks in a Roth IRA.

Now that my cash is free, I expect to invest another $75k within the next 12 months. So my first question is about the timing for that investing. I was planning on spreading it out equally over the 12-month timeframe, in order to do some dollar-cost averaging, especially given the up point we appear to be at with the market. Is that wise, given how much I will end up having on hold during that timeframe?

Second, where is the ideal place to invest in the current/coming market conditions? The fact that stocks are up as much as they are makes me nervous about dumping a lot of money into them right now, but with interest rates in the gutter, the prospects of bond investing seems even less attractive. My thought is to keep sticking with stocks for a while longer, with the anticipation of switching new investments over to bonds after boom-time had driven interest rates back up. Thoughts?
« Last Edit: May 09, 2013, 12:39:34 PM by JGB »

the fixer

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Re: Investing a Big Chunk During a Boom?
« Reply #1 on: May 09, 2013, 12:28:57 PM »
What your $75k is invested in today is irrelevant; where you want it to be is what's important. So, if you instead had $75k in stock index funds you would need to make exactly the same decision: where do I feel comfortable with my money going forward?

So now it's just the basics of investing. Pick an asset allocation that makes sense based on your risk tolerance (if you're shaky about putting too much money in stock right now, that probably means you don't have an incredibly high tolerance). Figure out what accounts should hold what assets. Then "rebalance" (buy stocks, bonds, CDs, etc. with your cash).

dollar cost averaging has less risk but also less return. On average DCA strategies lose money over dumping everything in the market at once, which makes sense because the stock market's long-term trend is upward.

JGB

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Re: Investing a Big Chunk During a Boom?
« Reply #2 on: May 09, 2013, 01:42:17 PM »
True, the crux if the matter is about asset allocation, which is a topic I know very little about (hence having everything up to this point in stocks). My primary concern is return rate, though a secondary goal is to have the money with in a way that is helpful for retirement (at least partial) within the next ten years.

The question around DCA is whether or not you gain more from lowering risk than from lowering return over the time grame in question. My thought on this is that you likely do given current conditions... But I welcome arguments to the contrary.

brokeresident

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Re: Investing a Big Chunk During a Boom?
« Reply #3 on: May 09, 2013, 02:16:40 PM »
I am "iffy" about this as well, and since I'm just going to be starting my first real job and putting money away for retirement. I'll probably invest in dividend growth stocks (I already have a couple in my taxable account, now to just do it in a Roth IRA) since those companies tend to be less volatile in price fluctuations compared to the broader market and the accumulated dividends will be nice for when there is finally a pullback in the market and an investment opportunity. I know past performance is no guarantee of future returns, but I figure if MCD and KO have been able to increase dividends annually for decades even through the boom-and-bust of the market, they must be doing something right.

the fixer

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Re: Investing a Big Chunk During a Boom?
« Reply #4 on: May 09, 2013, 02:40:47 PM »
The question around DCA is whether or not you gain more from lowering risk than from lowering return over the time grame in question. My thought on this is that you likely do given current conditions... But I welcome arguments to the contrary.
You cannot know in advance whether or not you will win, but there's a ~51% chance you will lose. The losses would probably be minor though.

Here's a good blog post on the topic: http://www.obliviousinvestor.com/lump-sum-vs-dollar-cost-averaging/

Mazzinator

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Re: Investing a Big Chunk During a Boom?
« Reply #5 on: May 09, 2013, 02:55:45 PM »
Quote
Second, where is the ideal place to invest in the current/coming market conditions? The fact that stocks are up as much as they are makes me nervous about dumping a lot of money into them right now, but with interest rates in the gutter, the prospects of bond investing seems even less attractive.

First off, let me say, i have no money to invest. My question is more curiosity.

How can stocks and bonds both be at their all time high??? I read one article that says stocks are at their highest now..then another one saying bonds are at their all time high... What gives??

the fixer

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Re: Investing a Big Chunk During a Boom?
« Reply #6 on: May 09, 2013, 06:33:58 PM »
First off, let me say, i have no money to invest. My question is more curiosity.

How can stocks and bonds both be at their all time high??? I read one article that says stocks are at their highest now..then another one saying bonds are at their all time high... What gives??
I don't know the answer for sure, but my guess is QE policies by the various central banks have a lot to do with it. The Fed is buying lots of Treasuries, which raises the price. This might also be driving stocks higher because of people desperately seeking yield via dividend stocks, REITs, etc. but I don't think that's the only factor.

nktokyo

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Re: Investing a Big Chunk During a Boom?
« Reply #7 on: May 09, 2013, 06:36:20 PM »
Be fearful when others are greedy...

daymare

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Re: Investing a Big Chunk During a Boom?
« Reply #8 on: May 10, 2013, 09:13:06 AM »
I'd suggest reading Bernstein's 'The Intelligent Asset Allocator' -- this will teach you the basics of asset allocation (and the math/stats/data behind it).

I think that DCA can be helpful psychologically -- ie, you have 24K to invest, so do it by putting in 2K every month for a year.  This way, you ease into investing (which terrifies a lot of people), and you practice a bit of buying low & selling high, as in, you buy more of a stock when it is cheaper, and less when it is more expensive because you are putting the same fixed amount in.

DVA (dollar value averaging) is similar but slightly more complex -- you essentially (taking the prior example of having 24K to invest, nothing invested currently) decide that you want to have a certain amount after every month, ie, 2K more than the prior month.  So, if you put in 2K in the first month, and it went up to 2.5K by the next month, you would put in just 1.5K to bring you up to 4K.  On the other hand, if your assets went down in value, to 1.5K, you're contribute 2.5K to get to the 4K.  You're essentially also trying to buy more when assets are cheaper, and buy less when they are expensive and doing well.

That said, I've personally always just put in a lump sum -- I save for my Roth IRA contribution during the prior year, and then come January 1, put in the $5,500 (current max for people my age) in.  My thought is that since the market generally trends upwards, it'll benefit me to put in the money earlier instead of later.  I'd also note that while I firmly believe predicting trends in the short-term is quite silly, there has been a slight positive correlation found for asset price month-to-month.  It's not large -- about 4% of an increase/decrease in price can be tied to the prior month's increase/decrease in price.  But it does mean that re-balancing very often isn't necessary, and perhaps a bit harmful relative to re-balancing once a year. (And when I contribute each year, I basically contribute in a way that puts me back to my target allocation)  Bernstein mentions it in the book I recommended above, using the example of US/Japan equities -- for a decent period of time, increase in value of US stocks corresponded to decrease in Japanese stocks -- if you had rebalanced frequently, you would be much worse off than if you had rebalanced less frequently (ie, once per year).

I was actually just discussing the 'ideal' frequency for re-balancing with my boyfriend -- I tried to convince him that once a year is ideal for your average buy-and-hold investor: it's long enough to take advantage of slight momentum, but short enough that if your asset allocation goes way off your intended allocation, you can re-balance and make sure you've got an appropriate level of risk (as opposed to way higher than intended because stocks did well and grew to a significant chunk of your portfolio).

Nords

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Re: Investing a Big Chunk During a Boom?
« Reply #9 on: May 11, 2013, 08:25:29 PM »
Second, where is the ideal place to invest in the current/coming market conditions? The fact that stocks are up as much as they are makes me nervous about dumping a lot of money into them right now, but with interest rates in the gutter, the prospects of bond investing seems even less attractive. My thought is to keep sticking with stocks for a while longer, with the anticipation of switching new investments over to bonds after boom-time had driven interest rates back up. Thoughts?
You're asking questions about market timing, not asset allocation.

If you want to be a value investor who waits until the market goes into a recession, then park your cash in CDs and wait for it.  You'll know it's here by the market dropping 20%.  We just can't tell you when it'll be here, and you'll feel miserable sitting on the sidelines until then. 

If you want to be invested in the market (because it might keep going up, and you'd miss out!) then pick your asset allocation.  The Bogleheads Wiki has the basics of figuring out your goals, setting up an investment policy statement (don't get hung up on formats, just decide what you want), and then choosing the assets.  http://www.bogleheads.org/wiki/Main_Page

I'm not going to get into stock-market analysis except to observe that the fundamentals today are better than they were in 2007.  A lumpy recovery is still in progress.

After you choose your AA, you could do a lump sum.  The odds are probably in your favor.  But if it's going to keep you laying awake at night then break it into 4-12 monthly chunks and invest them that way.  A decade from now, I doubt that either way will amount to a significant percentage difference.  It's how you'll remember it that counts in choosing your decision.

Mr Mark

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Re: Investing a Big Chunk During a Boom?
« Reply #10 on: May 12, 2013, 12:07:40 AM »
Second, where is the ideal place to invest in the current/coming market conditions? The fact that stocks are up as much as they are makes me nervous about dumping a lot of money into them right now, but with interest rates in the gutter, the prospects of bond investing seems even less attractive. My thought is to keep sticking with stocks for a while longer, with the anticipation of switching new investments over to bonds after boom-time had driven interest rates back up. Thoughts?
You're asking questions about market timing, not asset allocation.

If you want to be a value investor who waits until the market goes into a recession, then park your cash in CDs and wait for it.  You'll know it's here by the market dropping 20%.  We just can't tell you when it'll be here, and you'll feel miserable sitting on the sidelines until then. 

If you want to be invested in the market (because it might keep going up, and you'd miss out!) then pick your asset allocation.  The Bogleheads Wiki has the basics of figuring out your goals, setting up an investment policy statement (don't get hung up on formats, just decide what you want), and then choosing the assets.  http://www.bogleheads.org/wiki/Main_Page

I'm not going to get into stock-market analysis except to observe that the fundamentals today are better than they were in 2007.  A lumpy recovery is still in progress.

After you choose your AA, you could do a lump sum.  The odds are probably in your favor.  But if it's going to keep you laying awake at night then break it into 4-12 monthly chunks and invest them that way.  A decade from now, I doubt that either way will amount to a significant percentage difference.  It's how you'll remember it that counts in choosing your decision.


This is wise council indeed. +1 

Think long term. Everything's gonna be alright. Don't focus on speculation. Save, invest, reduce want.