Author Topic: Time to change strategy?  (Read 1779 times)

celticblue

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Time to change strategy?
« on: December 23, 2018, 12:07:02 AM »
Hi

I am trying to make a non emotional decision and want to sense check it with others in case I am being swayed by current market.

I Fired in the fall at same time as selling a huge chunk of real estate.I would normally put straight into the market because we know lump sum on average beats DCA. However as this was the big FIRE time I decided to follow the strategy of a rising equity glide path via DCA in order to mitigate sequence of returns risk. I wanted to avoid impact of an immediate 40-50 percent drop even though there was low risk of this happening.

Now the things I invest in are around 20 percent down. So it feels like I have successfully avoided the worse case scenario . The strategy did its job. Another 20-30 drop is historically unlikely but also within my comfort zone .

So now I am thinking of returning to a straight forward lump sum investment at my normal asset allocation. Essentiall going back to immediate buying and holding 80:20 stocks and bonds .

I don't normally change strategy during market downs but now I am trying to assess if my unusual choice of DCA of a very large sum due to my fire date has served the larger part of its purpose and I can revert to my overall investment approach.

I would love to hear your thoughts

Saving in Austin

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Re: Time to change strategy?
« Reply #1 on: December 23, 2018, 08:25:41 AM »
You just got lucky.

Now invest and forget about it.

maizeman

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Re: Time to change strategy?
« Reply #2 on: December 23, 2018, 08:38:35 AM »
How much longer would it take you to get entirely invested in the market if you continued dollar cost averaging at the current rate?

I would say either is fine. If you put the rest of it in as a lump sum, your average outcome will be a bit more money. If you continue with dollar cost averaging, your worst possible outcomes will be a little less bad than with a lump sum investment.

In your shoes I'd be a little bit inclined towards continued DCA just because I've very wary of anything that sounds like changing investing behavior/plans in response to market moves. (This is also the reason I considered and then rejected the idea of front loading my tax deferred accounts in early 2019 if the market stays down.)

Anyway, it sounds like you're in a good situation. Good luck!

soccerluvof4

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Re: Time to change strategy?
« Reply #3 on: December 23, 2018, 11:07:12 AM »
I'd be like maizeman and be more inclined to DCA..

HipGnosis

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Re: Time to change strategy?
« Reply #4 on: December 23, 2018, 12:26:59 PM »
Buying at a low is the 'best case scenario'

The market is still going down

TomTX

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Re: Time to change strategy?
« Reply #5 on: December 23, 2018, 05:10:36 PM »
Buying at a low is the 'best case scenario'

The market is still going down

Until it goes up. :D

aceyou

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Re: Time to change strategy?
« Reply #6 on: December 25, 2018, 06:26:35 AM »
I'd invest it all asap and be happy that I gave myself the highest probability of the best outcome possible,  regardless of the actual outcome, which is impossible to know.

CoffeeR

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Re: Time to change strategy?
« Reply #7 on: December 25, 2018, 01:17:16 PM »
I'd invest it all asap and be happy that I gave myself the highest probability of the best outcome possible,  regardless of the actual outcome, which is impossible to know.
"best outcome possible,"... really? That depends on how you define "best outcome". Investing all at once as soon as possible will, on average, result in a higher total return compared to gradually entering the market with say a DCA type strategy. The thing is, the DCA  type strategy lowers the spread of the possible outcomes. There are people, me included, who (at times) would be willing to reduce the average outcome in order to lower the spread of possible outcomes. In other words: "yes" entering the market all at once will give you a better average outcome, but also the possibility of a much lower or higher outcome than entering the market gradually.

BicycleB

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Re: Time to change strategy?
« Reply #8 on: December 25, 2018, 03:44:56 PM »
No, don't change strategy. Keep DCAing!

It's a reasonable strategy to achieve the risk-reducing goal that you set. It's still reasonable. It's working. Keep doing it.

MustacheAnxiety

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Re: Time to change strategy?
« Reply #9 on: December 28, 2018, 04:34:37 AM »
What is you safe withdrawal rate, current asset allocation, and age? It sounds like your planned final allocation is 80/20. Is that right? Do you have any fixed income now or coming in the next 10 or even 20 years. Also do you have a mortgage? My advice will change depending on your answers.

Historically, paying off the mortgage is your best hedge against sequence of return risk. If you have one and it has a crazy low interest rate I can see why you might be interested in alternative ways to hedge against sequence risk.

True market timing is gambling as some have pointed out but that is not what you are doing. Hedging against sequence risk is smart when market valuations are quite high at retirement, especially if your initial SWR is >3%.

I am personally not as confident as you that another 20-30 % drop is unlikely. Economic fundamentals seem strong today, but equity valuations are still historically inflated (Shiller PE of 27.5). A recession could easily arrive in the next couple years and take markets down quite a bit further.

I personally like the model in the below link for an active rising equity glide path from a 60/40 to a 100 percent stock allocation if you are looking at a 50+ year retirement without substantial other sources of income.
https://www.earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

But managing the glide path seems like a pain and it sounds like you may never be comfortable with 100 percent stocks.  If you want to stick with something more like 80/20, consider lump sum investing to 80 percent stocks, keeping 3 years of cash, and putting the rest in bonds. Then spend the cash buffer only if your investments are down more than 20 percent and dont replenish it.
https://www.earlyretirementnow.com/2018/05/23/the-ultimate-guide-to-safe-withdrawal-rates-part-25-more-flexibility-myths/

celticblue

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Re: Time to change strategy?
« Reply #10 on: December 31, 2018, 03:57:34 PM »
Thank you everyone.

In answer to the questions: I have no mortgage, no sources of fixed ash income in next 20 years, my withdrawal rate budget is 3.5% estimated but am currently actually only spending 3.1%. I had some fat budgeted.

I have put aside approx 2 years expenses which I am gradually running down rather than withdrawing from market with VASGX DOWN 15 or so percent . In total I am about 25 percent cash due to real estate sale and cash buffer. I am currently DCA which should eliminate cash in next 5 years and take me to 80:20 stocks to bonds

aceyou

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Re: Time to change strategy?
« Reply #11 on: January 01, 2019, 08:04:47 AM »
I'd invest it all asap and be happy that I gave myself the highest probability of the best outcome possible,  regardless of the actual outcome, which is impossible to know.
"best outcome possible,"... really? That depends on how you define "best outcome". Investing all at once as soon as possible will, on average, result in a higher total return compared to gradually entering the market with say a DCA type strategy. The thing is, the DCA  type strategy lowers the spread of the possible outcomes. There are people, me included, who (at times) would be willing to reduce the average outcome in order to lower the spread of possible outcomes. In other words: "yes" entering the market all at once will give you a better average outcome, but also the possibility of a much lower or higher outcome than entering the market gradually.


Hey CoffeeR,  thanks for your post.  You've changed my opinion.  As I think about it, there are plenty of instances in life where I choose to reduce expectation to lower variance.  I'd still just put it all in at once because of my age, risk tolerance, and time frame until I need the money, but that doesn't mean it's always best for other peoples situations.   Happy New Year.