Dollar Cost Averaging - 500k Influx

[triple7stash]

Hello All,

A family member (52 y/o, with pension but no other savings) just receiving an influx of 400k of after tax dollars. The plan is to maintain the same lifestyle, but invest the 500k to help with retirement as her pension payout will likely be ~60% of her pay. It will be invested in vanguard funds and for back of the napkin math will look like (20% bonds, 20% small cap, 20% mid cap, 20% large cap).

I personally don’t have a vanguard account, but from my understanding when you deposit the funds they can sit in some sort of fund (possibly cd?) that earns 1-2%. So then the plan was to slowly funnel the money into the index funds mentioned above. My question specifically is what is a good breakdown/timeframe for purchasing the index funds. My thought was  putting 1% of the funds (split using the above percentages) into those index funds over 100 weeks. Then once all the funds are in indexed funds. Rebalance annually or as needed. Any thoughts? Specifically regarding the timeframe to purchase all of the shares and what percentage to purchase in.

[Andy R]

I found this helpful for lump sum investing
6 Things To Consider When Investing A Lump Sum - Rick Ferri

If you do decided to go with DCA'ing, I'd put in around 40-50% up front in case the market continues to rise and then falls after the money goes in, that way at least you had some decent gains from the run-up to cushion the drop, and if it falls sooner than later, you still have around half your money to buy cheap.

[terran]

It will sit in a money market fund, which is currently paying a little over 2% interest.

Research by Vanguard has show that lump sum (all at once) investing beats dollar cost averaging 67% of the time, but can be a useful behavioral trick to get oneself to invest: https://personal.vanguard.com/pdf/ISGDCA.pdf. Basically, investing all at once is statistically going to result in the best return, but if you're too scared to invest, or will freak out and panic sell if the markets go down after in you invest it all then dollar cost averaging might make sense. To my thinking, the natural extension of this conclusion is that one should dollar cost average over as short a time span as one is comfortable with since the only purpose of dollar cost averaging is to increase comfort.

[Radagast]

Those add to 80%. I recommend an international component, it will be a better diversifier than another slice of US company stock. Not less than 50% stock, not more than 50% US stock, 10-40% bonds (depending on availability of social security, willingness to take risk, and other factors), feel free to swap real estate in as desired.

$500k is large enough that DCA could start to make sense. Of course there is no good time frame to do it over, because the odds are that you will end with less money than if you had invested all at once over any time frame. You are sacrificing a better best case, a better mean case, and a better median case to get a better worst case. One year seems ok, or 100 weeks, or whatever. Not more than two years for sure. That said, at 52 y/o pretty soon this asset allocation will be fixed for life and there will be no opportunity to DCA. If family person is able to live with that allocation for the next 40 years, what is so scary about the first 2 years? You could be looking at a "poor allocation problem" rather than a "dollar cost averaging problem."

It's getting old but my favorite investment author has a guest post which concludes one year is the optimal period. http://www.efficientfrontier.com/ef/997/dca.htm

Vanguard deposits default to Vanguard Federal Money Market Fund, which is consists of US government debt maturing within 90 days.

If you decide to DCA, be certain to automate this process to prevent yourself and others from screwing it up.

[CorpRaider]

@Radagast

Bill Bernstein is your favorite investing author?  Did you catch his appearance on the masters in business podcast (maybe a month or two ago)?  It was overall pretty good and you might want to give it a listen if you are a fan (though I think Ritholtz is a below average interviewer...clearly he had not even scanned Bernstein's latest with his jokes about FI).

[Must_ache]

DCA is market timing, right?  If you believe the stock market is going up, you should go all in. 

[Radagast]

@Radagast

Bill Bernstein is your favorite investing author?  Did you catch his appearance on the masters in business podcast (maybe a month or two ago)?  It was overall pretty good and you might want to give it a listen if you are a fan (though I think Ritholtz is a below average interviewer...clearly he had not even scanned Bernstein's latest with his jokes about FI).

Thanks for pointing it out! I have not been following as closely recently, as I seem to have read most of his ideas already. But always good to skim something new!

[triple7stash]

Those add to 80%.

$500k is large enough that DCA could start to make sense. Of course there is no good time frame to do it over, because the odds are that you will end with less money than if you had invested all at once over any time frame. You are sacrificing a better best case, a better mean case, and a better median case to get a better worst case. One year seems ok, or 100 weeks, or whatever. Not more than two years for sure. That said, at 52 y/o pretty soon this asset allocation will be fixed for life and there will be no opportunity to DCA. If family person is able to live with that allocation for the next 40 years, what is so scary about the first 2 years?

Ahh yes, I missed adding the final 20% international. That should have been there.

And it’s not necessarily the allocation that I’m worried about. My thought was just an overall hedge against market timing since she is likely give or take 10 years from retirement. Thanks all for the helpful comments and links. It’s funny I actually went to college for finance (concentration in financial planning), and it’s funny looking back at what was taught. Very conservative strategies and I guess DCA was just one of those that I never questioned. Now that I even thought to challenge that assumption, not opting to DCA makes much more sense. Although I may slightly just to avoid An awkward tension in the event there is a manor downturn.

[Radagast]

Regarding asset allocation:
Vanguard Large Cap and Vanguard Small Cap perfectly split up the market in terms of market capitalization, while S&P500 and Vanguard Small Cap have a tiny gap between them. Vanguard Mid Cap awkwardly overlaps significant portions of all of the above. A less redundant allocation might be:
25% Vanguard US Large Cap / S&P500
25% Vanguard US Small Cap
25% International
25% Bonds

This will lower your exposure to potential poor US stock performance, without significantly increasing your exposure to bonds and currency risk. 25% bonds happens to be ERN's sweet spot for highest safe withdrawal rate with a stable allocation and also falls within Ben Graham's range of bond allocations, as well as the center of my recommended range. 25% (of total) international is Dave Swensen's sweet spot for minimum currency volatility as well as that of some other people I don't carry references to off the top of my head.