DCA or big buy: how do I move a lot of cash into the market?

[what]

I'm a long-time saver currently sitting on a lot of unproductive cash, wanting to build an investment portfolio. For the equities portion, I'd like to invest about $250,000. Should I simply invest x per month to gradually build the portfolio and take advantage of dollar cost averaging (DCA) over the next 250,000/x months? Or should I make a big buy to get the whole sum into the market now?

I am an investing novice; my gut feeling is that I should start slowly for the benefit of dollar cost averaging. This will also give me a chance to get used to the ups and downs of the markets gradually. On the other hand, I've grown uncomfortable sitting on a pile of unproductive cash.

To clarify, I'm not looking for advice on WHAT to invest in; I simply want to know HOW -- quickly or slowly -- to bring a big chunk of my net worth into the market.

It probably makes little difference, but I live in Canada.

Thanks for your advice in advance.

[Chris]

Or should I make a big buy to get the whole sum into the market now?

^Not this.

As a long-time saver, you will likely need some time to become accustomed to the gyrations of the market. The benefits of DCA is that you automatically end up with more shares when prices are low and fewer when prices are high. Over a long period of time, you'll effectively be buying at the average price.  So you won't beat the market this way, but you won't be playing roulette either.

[arebelspy]

Another vote for DCA.

[what]

Thanks for your responses. Two votes for DCA so far.

As a follow up, what sort of time frame should I look at to move $250,000 into the market? A year? Several years?

[Mr Mark]

and an other vote for DCA.

Nice problem to have.

I had the same problem with 10% of your 'stash. Wanted to 'wait' for a dip, but stuck to feeding it in, and as a result caught the upswing last week. :-)

There is some research into statistical market timing - which suggests to avoid buying in July and August, and prefer buying in Oct - Dec... And within the month, best to buy about 1 week before end of the month.  But this is statistical historic averaging, so the actuality may be different. So, I'd say split into 5 pieces, and buy on 25th of every month avoiding July and August!

[sol]

If I was moving 250k into stocks, I'd probably space it out over at least 18 months, with the remainder sitting in US treasuries or something like VIPSX or VFIIX in the mean time.

You definitely don't want to go all in at once, but waiting too long means losing potential returns.  I feel that 18 months is long enough to smooth out normal market volatility, but not long enough to smooth out the business cycle.

Big hedge funds do this same kind of work, but they tend to go in over a year or so every few years, when the market is down.  I don't think a private investor can or should have quite that much patience.

[TLV]

Another option (slightly more complicated than DCA) would be value cost averaging. Like DCA, you pick a target amount to add each month. You also pick a target growth rate - the rate you think the investment should return, on average. Each time you invest, you compare how your 'stash has grown to the target growth rate, and adjust your additional investment amount by the difference.

As an example, say your target is $10000/mo., with a target growth rate of 6% annually (picked for easy math). The first month you put in $10000. After 1 month, at 6% annual growth you'd expect about a .5% increase on average. .5% of 10000 is $50. If you have $10050 in the account after 1 month, then you're right on track and you invest another $10000. If the market did really well and you have $11000, then you reduce your additional investment by the $950 difference and only put in $9050. Likewise if the market crashed down to $7000, you put in an extra $3050 in addition to your $10000.

For the 3rd month, you'd expect $20050 + .5%, or $20150.25, so if it's more or less than that you again adjust your contribution.

This method requires more work than DCA - you have to check it every month and do a calculation - but enhances the "buy more when stocks are cheap, less when they're expensive" effect. You also have to have a good estimate of the return (at least for the average return over your investment period) - if you guess too low, then you won't be putting money into a winning investment as quickly, and if you guess too high then you'll be throwing more money than you wanted at it for less return than expected.

[pocketmint]

What TLV said. Value averaging > cost averaging if you're up for the extra effort.

"Results strongly suggest, believe it or not, that value averaging does actually provide a performance advantage over dollar-cost averaging and random investment techniques, without incurring additional risk. As might be expected from a technique that does outperform, the higher the price variability and the longer the investment time horizon the better."

http://www.studyfinance.com/jfsd/pdffiles/v13n1/marshall.pdf

[judgemebymyusername]

Count me as a vote for lump sum.

This issue has been beaten to the ground over in the forums at bogleheads.org. It's an investment forum focuses on the ideals of John Bogle (found of Vanguard, which MMM recommends). The general consensus over there is to determine your asset allocation and then lump deposit into it. The only value you'll get from DCA is it may make you feel safer or calm your nerves.

In short, from a financial perspective, lump sum wins. From an emotional perspective, DCA wins. Either way, you're the one who successfully saved that much money in the first place, so you win no matter what ;)

Keep in mind that part of your asset allocation plan revolves around rebalancing the % of your portfolio at regular intervals, say twice a year. This forces you to sell assets that have increased at a higher pace to buy assets that have dropped or increased at a slower pace. Thus, forcing you to sell high and buy low. The value averaging method posted above appears to combine rebalancing with DCA.

[sol]

In short, from a financial perspective, lump sum wins.

That's only true if you go all-in on a down day.  The last time I opened a new Vanguard fund, I put the $3k minimum in based on the morning DJI drop of about 5% in November of 2008.  By the end of the day when my purchase was made, it was up 11% instead.  That kind of volatility makes the all-in-at-once approach a loser.

So I still recommend spreading it out, at least over a few days if not a few weeks or months.  It's really a matter of how much volatility you're trying to smooth out.  Doing it all at once is the equivalent of blind market timing.

As a side note, I should say that my earlier vote to spread it out over 18 months was based on the assumption that 250k is a significant fraction of your retirement portfolio.  If you're coming up with a new 250k to invest every few months, then I would of course dump it in much faster.

[velocistar237]

I like the idea of putting everything into a bond fund and then value-cost averaging over into equities over the course of 6 months to a year.

That's only true if you go all-in on a down day.

I believe B is referring to studies that take a larger view.
Here is one such study: http://www2.stetson.edu/fsr/abstracts2/v2-1a4.pdf

[HeidiO]

DCA doesn't make very much sense to me, when you are talking about a sum you have sitting there.  I was in the same situation maybe 15 years ago (less $, but a large amount for me as a college student.)  I had read lots of books, so I KNEW I would make more money DCAing it in over 12 months.  Except the markets were rising, so every single month I was able to buy less than the month before.  It just doesn't make sense if the markets are going up.  Do I know the markets are going up?  Of course not.  But if I was in your situation I would be willing to do a little research and make a guess.  After all, if you DCA you are making a guess that the markets are not signifigantly going up in your time frame.

[Mr Mark]

DCA doesn't make very much sense to me, when you are talking about a sum you have sitting there.  I was in the same situation maybe 15 years ago (less $, but a large amount for me as a college student.)  I had read lots of books, so I KNEW I would make more money DCAing it in over 12 months.  Except the markets were rising, so every single month I was able to buy less than the month before.  It just doesn't make sense if the markets are going up.  Do I know the markets are going up?  Of course not.  But if I was in your situation I would be willing to do a little research and make a guess.  After all, if you DCA you are making a guess that the markets are not signifigantly going up in your time frame.

In this situation, I think Sol is absolutely correct about the short term volatility risk - so even if you want it "all in now", best to spread it around over a week or 2. 

[Ben]

I would agree with both TLV and B. Value averaging is probably better than simple dollar cost averaging, lump sum is going to give you superior returns MOST of the time.

But if you have a negative stimulus (e.g. market drops 10-15% your first week in), it may cause you to panic and change your strategy. People have a lousy hot/cold empathy gap- it's almost impossible to tell how you will react to losing money without ACTUALLY losing money to test it out (e.g. even though I think I will be a stoic in the face of losses, I've never lost $25k in a short amount of time, and may react worse than expected).

So putting a portion in via lump sum (and investing the rest with some sort of a steady-distribution strategy) may be an appropriate middle path- the total funds will keep going up as you insert more money into the market, and you will probably get the enjoyable experience of buying some stocks 'on sale.'