Author Topic: Would you be brave enough to lump sum invest a large amount right now?  (Read 18549 times)

jelody

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Hello, I recently inherited a seven figure amount, representing about 150% of my net worth. I'm single and now have enough to retire in my mid-30s but I plan to keep working part-time and make enough to cover most of my expenses for at least a few more years. My dilemma is whether I should invest this inheritance lump sum or dca? I know that statistically, lump sum is the way to go but I'm scared to lump sum such a large amount, especially since the market is high right now. What would you do in my shoes?


nereo

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Hello, I recently inherited a seven figure amount, representing about 150% of my net worth. I'm single and now have enough to retire in my mid-30s but I plan to keep working part-time and make enough to cover most of my expenses for at least a few more years. My dilemma is whether I should invest this inheritance lump sum or dca? I know that statistically, lump sum is the way to go but I'm scared to lump sum such a large amount, especially since the market is high right now. What would you do in my shoes?

I would do a little FIRE happy dance.  Then I would lump-sum invest it.  Sounds like you are FI at least 2x over (if this amount represents 150% of your net worth), so even if the market tanks tomorrow you'll still be FI.

Also - who's to say the Market is "high" right now?  We're almost exactly where we were a year ago...

mcj

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Its a question of data vs emotion.

Numbers wise lump sum is the way to go.

If DCA is going to make you feel better and you can't overcome that emotional block, then maybe that is a better option for your peace of mind, even if it costs a few $ in the long run.

I would lump sum it, because even if it declined in the short term, it wouldn't matter in the long run.

But if it's gonna drive you crazy with worry maybe do half and half?
« Last Edit: April 20, 2016, 06:47:52 PM by mcj »

Blindsquirrel

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   Up to you but I would tend to DCA as I am risk adverse. From a historical perspective, reversion to the mean happens.  Statistics say market is a bit over bought and dollar flows out have been much greater than dollar flows in for 3 months. You are playing with house money though and if you set your SWR near the dividend yield point it does not matter much. Dividend ETFs are richly valued for a reason. Good luck data is from     http://www.multpl.com/
Current S&P 500 PE Ratio: 24.30 +0.02 (0.08%)
4:13 pm EDT, Wed Apr 20
Mean:   15.59   
Median:   14.62   
Min:   5.31   (Dec 1917)
Max:   123.73   (May 2009)

WildJager

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If you do DCA, at least put the pending cash into a CD or something.  Parking cash into a savings account right now will lose you purchasing power, and will erode any potential gains you'd make with DCA.  It's a strange time for the market right now, so personally I'd invest it all in one lump sum since the alternative isn't great.

Paul der Krake

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It would sure take a couple beers. Even then I would probably chicken and do it over a couple months.

Pylortes

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No I would absolutely not lump sum it.  The markets are at relative highs and there's that whole "sell in May and go away" line which has seemed to play out quite often over the past few years.  Of course it makes sense to get your funds in the market as soon as possible to allow more time in the market,  but the risk of putting 100% of a large sum in at a single time is too great for me (and I speak as someone with 100% in stocks/mutual funds so I am not too risk averse.

If it was me I'd break it in into 4-5 segments spread out over the next 10-12 months and then I would absolutely pull the trigger on getting the first segment in there pronto.  I would sleep a little easier knowing if there was an immediate 10% drop that only 20-25% of my money was impacted and my later deposits would benefit from the lower cost of buying in.  Things could certainly go the other way also, but I'd be willing to forgo that possibility to reduce the risk somewhat.

Tyson

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I'd lump sum it.  But I'm not risk averse.  If you ask risk averse people, you'll get one of 2 answers.  If markets are trending down they'll say:

"The markets are tanking, you shouldn't invest".

If the markets are going up they'll say:

"The markets are overpriced and about to tank."

Either way, they tell you that you'll lose.  I'm not sure when these people think is ever a good time to actually invest money.

ransom132

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I would take the entire inheritance and invest it. I don't time the market, only few can win that game. Good luck with your choice and congratulations.

Jack

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Parking cash into a savings account right now will lose you purchasing power...

Not to mention, exceed FDIC insurance limits -- you'd need to park it in several accounts ($250K per account, maximum).

...and will erode any potential gains you'd make with DCA.  It's a strange time for the market right now, so personally I'd invest it all in one lump sum since the alternative isn't great.

Interesting point.

I was going to say I'd DCA it, but now I'm thinking maybe lump-sum invest it, but in a more conservative asset allocation than I'd otherwise go with. I'm currently 100% stocks, but if I had a large lump sum like this I might go something like 60/40 stocks/bonds and slowly shift the allocation back to about 90/10 over time (maybe even as long as 5 years or so).

MrDelane

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #10 on: April 20, 2016, 08:48:23 PM »
Hello, I recently inherited a seven figure amount...

I'm assuming this came at the cost of losing someone close to you.
If so, sorry for your loss.

As far as what you should do - there is no reason it needs to be all or none.
At what point would you feel comfortable lump sum investing it?
Half of it?  A quarter of it?

Whatever that amount is, invest it... and then possibly DCA the remainder across a period that you are comfortable with.

It really is a question of emotion and comfort.



jelody

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #11 on: April 20, 2016, 09:43:51 PM »
Thank you for the opinions so far. And thanks MrDelane- without putting too much personal info out there just in case someone I know is a forum member, I did lose someone very very dear to me, and I'd give up everything I have to get this person back. The one consolation I have is that the money did bump me into FIRE.

Villanelle

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #12 on: April 20, 2016, 09:53:27 PM »
I'm sorry for your loss.

I would invest it all immediately (assuming no higher interest debts), but maybe into a fairly conservative profile compared to my typical allocation. I'd use future investments to slowly pull myself back to my usual allocation, or perhaps slowly shift that way with quarterly rebalancing.

It's not the most rational, but if I really couldn't stomach dumping it all in the market in one day, that would be a compromise that I'd feel better about than just letting much of the money sit doing almost nothing. 

ShoulderThingThatGoesUp

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #13 on: April 21, 2016, 07:16:09 AM »
Are you really going to DCA it over a long enough period for it to matter?

rubybeth

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #14 on: April 21, 2016, 07:29:02 AM »
Very sorry for your loss. I would definitely lump sum it. Maybe you'd feel better about it if you called Vanguard or Fidelity or whatever and someone talked you through your options? You can do it online, but maybe that personal touch and someone to hear about the loss would put you at ease?

patchyfacialhair

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #15 on: April 21, 2016, 07:30:24 AM »
Of course this advice is worth exactly what you paid for it:

Invest it all. Keep living your life as if you didn't have the money. Then, once you're ready to pull the plug on your job (you said a couple/few years?), your investment will have been in the market for a bit, ideally with dividends reinvested (which would offset any market declines a bit during the same period).

AZDude

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #16 on: April 21, 2016, 08:50:00 AM »
Invest it all, but probably not 100% in stocks. REITs/bonds/blue chip dividend funds sound like a good choice for someone a little risk averse. You clearly have more than enough money, so just getting it to generate enough cash flow to cover whatever ridiculous amount you think you need is the way to go.

Metric Mouse

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #17 on: April 23, 2016, 12:10:07 PM »
Invest it all, but probably not 100% in stocks. REITs/bonds/blue chip dividend funds sound like a good choice for someone a little risk averse. You clearly have more than enough money, so just getting it to generate enough cash flow to cover whatever ridiculous amount you think you need is the way to go.

Great point AZ. Get that money working for you as fast as possible so you can move on with your life.

On topic: I had to log onto my accounts to check my asset price. At this point I would lump it in, based on the 12 month trends of my investments.

Telecaster

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #18 on: April 23, 2016, 12:52:26 PM »
No I would absolutely not lump sum it.  The markets are at relative highs and there's that whole "sell in May and go away" line which has seemed to play out quite often over the past few years. 

If it was me I'd break it in into 4-5 segments spread out over the next 10-12 months...

The value of the market has essentially zero predictive value for the market over the time frame we're talking about.  Robert Schiller has emphasized that the CAPE ratio does not work as a timing mechanism, because it doesn't.  The P/E or CAPE ratio correlation to market performance over a 12 month time frame is very low.  A real world example: The markets were valued about the same as they are now back around in late 1997.   If the OP had followed your strategy, he would have simply been buying at higher and higher prices over the years.   And the markets did not return to "average" value until 2012. 

However, market valuation is reasonably predictive of future returns over longer periods--like say 10 years.  So we can reasonably conclude it would have been better to buy in 2012 than 2016.   But we're stuck in 2016. 

That said, it can be scary moving big lumps of money around.  If it gives the OP some piece of money to DCA it over a period time, then that's fine.  But there is no sound financial reason to do so.





lizzzi

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #19 on: April 23, 2016, 03:00:23 PM »
Keep a tiny amount out to do something fun but not stupid...maybe have a nice dinner out to memorialize the person you inherited it from...or take a couple of days vacation in a beautiful area for the same reason. Then invest the lump sum wisely--as conservatively and economically as you wish, and let it crank--and stop fretting about it.

MrDelane

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #20 on: April 23, 2016, 04:59:24 PM »
If it gives the OP some piece of money to DCA it over a period time, then that's fine.

I'm not sure if that was a freudian slip or a purposeful clever turn of phrase - but either way I like it.

SwordGuy

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #21 on: April 23, 2016, 07:16:20 PM »
The market is going to drop.  It's going to be a big drop.

Guaranteed.

Now, that drop might be the next day or it might be 5 years from now.  ;)

You'll feel just as bad when it does, either way. :)

And then the market will go up the next day or 5 years later, and you'll feel great then. :)


I have $250,000 to invest for the same reason you do.  I've been putting it into the market in $50k increments every 2 weeks.   (I put the rest into the market pretty much as soon as I got it.)

It's a totally bogus, illogical compromise with myself.   But it works for me.




Retire-Canada

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #22 on: April 23, 2016, 07:26:18 PM »
Hello, I recently inherited a seven figure amount, representing about 150% of my net worth. I'm single and now have enough to retire in my mid-30s but I plan to keep working part-time and make enough to cover most of my expenses for at least a few more years. My dilemma is whether I should invest this inheritance lump sum or dca? I know that statistically, lump sum is the way to go but I'm scared to lump sum such a large amount, especially since the market is high right now. What would you do in my shoes?

I had half my invested $$ in cash in my brokerage account after transferring the money from an old financial advisor. Not as much $$ as you are talking about, but for me it's a lot. I invested over the course of a week or so. Then I went back to my normal investment pattern of monthly additions.

I'm not likely to get a big inheritance, but if I got $1M tomorrow I'd do the same thing and get the money invested fairly quickly after I received it.

oldladystache

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #23 on: April 23, 2016, 07:55:46 PM »
What happens if you carefully DCA it in, then the day after your last investment the market tanks?

I had a huge lump sum last year when I sold my house and it went right into the market. It's down a little but I'm not concerned.

NorCal

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #24 on: April 24, 2016, 08:05:50 PM »
Given the way you posed the question, I honestly believe that a 100% equity portfolio is not right for you.  Have you invested through a downturn before?

My honest advice is to do a very very careful assessment of your risk tolerance, and base your portfolio on that.

If you haven't invested through a downturn, I recommend taking whatever asset allocation you think you're comfortable with, and decrease your equity exposure by 10-20 percentage points.  That is, if you think you'd be comfortable with a 70/30 equity/bond portfolio, start with a 50/50 or 60/40 portfolio.

If you're truly emotionally comfortable with your asset allocation, you wouldn't be asking this question to begin with.

ooeei

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #25 on: April 25, 2016, 06:34:22 AM »
I'd DCA it over 2-3 years.  If it was a $20,000 bonus or something, I'd lump sum it no problem.  There will be many of those small windfalls over your life, so even though each individual one is a lump sum, if you look at them all over your life you're DCAing them.

For a once in a lifetime windfall, I'd rather not roll the dice, even if I have a 2:1 chance of winning.  If I invested it and lost $250k in a few months, I'd be devastated.  If I DCA and miss out on $250k in gains over 2-3 years, I could swallow that a bit better.  I know that doesn't make mathematical sense, but with over $1,000,000 on the line it's the choice I'd make to sleep at night. 

If I recall correctly, lump sum works out better ~2/3 of the time, and DCA works out better the other ~1/3.

You could always compromise and do 1/2 and 1/2.   

Retire-Canada

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #26 on: April 25, 2016, 07:02:39 AM »
For a once in a lifetime windfall, I'd rather not roll the dice, even if I have a 2:1 chance of winning.  If I invested it and lost $250k in a few months, I'd be devastated.  If I DCA and miss out on $250k in gains over 2-3 years, I could swallow that a bit better.  I know that doesn't make mathematical sense, but with over $1,000,000 on the line it's the choice I'd make to sleep at night.

This is a sincere question. Your post implies DCA will let you sleep better, but what happens if you DCA it in over 2 years. Miss out on $200K in gains and then the market drops such that you lose $250K of the new capital?

Back to NorCal's point...if the volatility is something you can't stand maybe DCA vs. lump sum isn't the issue it's an asset allocation that you can handle through thick and thin?

ooeei

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #27 on: April 25, 2016, 07:13:33 AM »
For a once in a lifetime windfall, I'd rather not roll the dice, even if I have a 2:1 chance of winning.  If I invested it and lost $250k in a few months, I'd be devastated.  If I DCA and miss out on $250k in gains over 2-3 years, I could swallow that a bit better.  I know that doesn't make mathematical sense, but with over $1,000,000 on the line it's the choice I'd make to sleep at night.

This is a sincere question. Your post implies DCA will let you sleep better, but what happens if you DCA it in over 2 years. Miss out on $200K in gains and then the market drops such that you lose $250K of the new capital?

Back to NorCal's point...if the volatility is something you can't stand maybe DCA vs. lump sum isn't the issue it's an asset allocation that you can handle through thick and thin?

That's not a new situation, it's just part of the risk of DCA vs lump sum.  You're just pointing out a situation where lump sum is superior.  That situation is probably a worst case scenario for DCA, and is still better than putting it all in a lump sum right before a drop.  At least in the situation you proposed you made some money during the (rapid) run up before the crash, as you had some of your money invested at that time, and that helped cushion the drop a bit.

Allocation can definitely play a role too, hadn't really considered that.

ZiziPB

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #28 on: April 25, 2016, 01:36:12 PM »
Before you make any decisions, take your time and read this:

https://www.bogleheads.org/wiki/Managing_a_windfall

Telecaster

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #29 on: April 25, 2016, 01:42:44 PM »
I'd DCA it over 2-3 years.  If it was a $20,000 bonus or something, I'd lump sum it no problem.  There will be many of those small windfalls over your life, so even though each individual one is a lump sum, if you look at them all over your life you're DCAing them.

For a once in a lifetime windfall, I'd rather not roll the dice, even if I have a 2:1 chance of winning.  If I invested it and lost $250k in a few months, I'd be devastated.  If I DCA and miss out on $250k in gains over 2-3 years, I could swallow that a bit better.  I know that doesn't make mathematical sense, but with over $1,000,000 on the line it's the choice I'd make to sleep at night. 

If I recall correctly, lump sum works out better ~2/3 of the time, and DCA works out better the other ~1/3.


You are rolling the dice either way.   You might DCA over two years and then the market could drop $250K the day after you made your final deposit.    DCA provides protection from market loss if and only if you correctly time the market.   


Since we're rolling the dice no matter what, why bet against the odds? 

Fishindude

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #30 on: April 25, 2016, 01:45:24 PM »
I would diversify.   
Keep some in CD's, cash set up in a rotation.
Invest in some stocks.
Pay off any debt.
Invest in some income producing real estate.
Have some fun with some.

ooeei

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #31 on: April 26, 2016, 07:16:25 AM »
I'd DCA it over 2-3 years.  If it was a $20,000 bonus or something, I'd lump sum it no problem.  There will be many of those small windfalls over your life, so even though each individual one is a lump sum, if you look at them all over your life you're DCAing them.

For a once in a lifetime windfall, I'd rather not roll the dice, even if I have a 2:1 chance of winning.  If I invested it and lost $250k in a few months, I'd be devastated.  If I DCA and miss out on $250k in gains over 2-3 years, I could swallow that a bit better.  I know that doesn't make mathematical sense, but with over $1,000,000 on the line it's the choice I'd make to sleep at night. 

If I recall correctly, lump sum works out better ~2/3 of the time, and DCA works out better the other ~1/3.


You are rolling the dice either way.   You might DCA over two years and then the market could drop $250K the day after you made your final deposit.    DCA provides protection from market loss if and only if you correctly time the market.   


Since we're rolling the dice no matter what, why bet against the odds?


It's simply having some downside protection for 2-3 years.  If stocks make a huge run up, I make some money, but not as much as a lump sum.  If stocks tank in that 2-3 years, I beat the lump sum.  If stocks tank immediately after 2-3 years, I make less money than the lump sum in the 2-3 years, then lose the same amount as the lump sum.  I still have some cushion from whatever I made in 2-3 years.

The only time where I don't make some money to cushion the blow from a market drop is if the market stays flat for 2-3 years then drops.  If that happens it's the exact same as a lump sum so it's a moot point.

Yes, mathematically I should be willing to lump sum and take a 30% drop one week after I invest with a smile on my face, because I know I'll make it back in the next 2-3 years when I normally would be DCAing.  I get how the math works.  I'm just saying that for me psychologically it would really mess with me to lose $300,000 in a week, even though I know the math works out.  Maybe that's because right now my net worth is ~$100,000, and in 5 years I'll be totally ready to invest $1,000,000 in one day. 

You've all given me some food for thought though, maybe asset allocation is the right call here.

GuitarStv

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #32 on: April 26, 2016, 07:28:06 AM »
Yes, I'd lump sum it.

It would be invested the same way that all of my money is invested.  Immediately and according to my existing investment strategy.

Telecaster

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #33 on: April 26, 2016, 09:16:47 AM »

It's simply having some downside protection for 2-3 years.  If stocks make a huge run up, I make some money, but not as much as a lump sum.  If stocks tank in that 2-3 years, I beat the lump sum.  If stocks tank immediately after 2-3 years, I make less money than the lump sum in the 2-3 years, then lose the same amount as the lump sum.  I still have some cushion from whatever I made in 2-3 years.

What happens in 2-3 years such that you no longer need or want downside protection? 


ooeei

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #34 on: April 26, 2016, 10:16:35 AM »

It's simply having some downside protection for 2-3 years.  If stocks make a huge run up, I make some money, but not as much as a lump sum.  If stocks tank in that 2-3 years, I beat the lump sum.  If stocks tank immediately after 2-3 years, I make less money than the lump sum in the 2-3 years, then lose the same amount as the lump sum.  I still have some cushion from whatever I made in 2-3 years.

What happens in 2-3 years such that you no longer need or want downside protection?

The money it made in that 2-3 years is the "protection".  I use quotes there because I know it's not really protection any more than the investment return on the increase after a drop is protection.  If I invest $1,000,000, by DCA, it increases to $1,100,000 over 2 years, then drops to $900,000 in a 1 day event, it sucks, but I still have $900,000.  I'd be bummed out, but not stressing too much because I've seen it make money for 2 years.

If I invest $1,000,000 all at once and it drops to $800,000 the next day, then over 2 years increases to $950,000, I'd be pretty stressed out that one day, and probably a few weeks/months afterward.  The result is I have more money with the lump sum, but have to watch myself invest more money than I've made in my lifetime and instantly lose 3 years of my salary in a single day.  I'd have the stomach with it for probably a $200,000 investment, but at this point in my life I know I'd be stressed out even though logically it SHOULD work out in the end.   

Again, I know it's not logical, and I'll cross that bridge when I come to it, but as of now I'm just not sure I could realistically deal with that sort of market swing with that amount of money without stressing pretty badly over it.  After DCAing it in I'd probably calm down a bit as there'd be some ups and downs over the time that I'd hopefully get used to.

Yes, theoretically I should be investing everything in lump sums.  So far I have, but I'm dealing with $10-20k investments.

I should also be selling anything I wouldn't buy for the money I could get for it today, yet I don't always do that either.  I'm not a perfectly logical robot, although if you asked my girlfriend she might disagree.  I know where my limits are, and they'll probably change over time as I get more time and money in the market. 

opnfld

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #35 on: April 26, 2016, 10:27:08 AM »
With that much money, I would reassess my asset allocation - probably decrease equities to 50% and lump sum the amount that put me at that allocation.  Either lump sum the rest in bonds or begin looking for appealing real estate investments and hire a property manager.

You didn't ask, but I wouldn't keep a part-time job.  If I was interested in continuing to work, I would start a business of some sort.

Tyson

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #36 on: April 26, 2016, 10:29:48 AM »
I think it depends on if this is enough $$ to retire on for you.  If it is, then I'd do a pretty conservative 50/50 ratio and retire.  If it's not, and you're going to be in the accumulation phase some more, I'd go with a more aggressive mix, say 80/20 with yearly rebalancing. 

PhysicianOnFIRE

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #37 on: April 26, 2016, 10:31:51 AM »
I'm sorry to hear you're in a position to be making this decision.

Bear in mind that it doesn't have to be an either / or proposition. You could immediately invest half, and DCA the other half over a timeframe you're comfortable with. Whichever you do, I would set it up to happen automatically so you can set it and forget it. Otherwise, you'll continue to wonder whether or not to stick with the plan, and might continually be second guessing yourself.

slugline

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #38 on: April 26, 2016, 11:03:27 AM »
I wouldn't be afraid, but it's OK to take some time to think over what you want to do. Meanwhile, assuming you're American and you've got the funds in a bank, keep in mind that FDIC insurance on bank accounts tops out at $250,000 per account. I'd at least consider spreading your windfall around to multiple accounts if you want to "play it safe" for a bit -- but not too long.

Cannot Wait!

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #39 on: April 26, 2016, 06:49:42 PM »
Sorry for your loss.

Lump sum it; it's free money!

phwadsworth

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Re: Would you be brave enough to lump sum invest a large amount right now?
« Reply #40 on: April 26, 2016, 07:11:39 PM »
Yes, I'd lump sum it.

It would be invested the same way that all of my money is invested.  Immediately and according to my existing investment strategy.
Ditto, I would get the money to work as fast as I possibly could!