Author Topic: Should I invest my annual roth IRA all at once?  (Read 2638 times)

texastumbleweed

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Should I invest my annual roth IRA all at once?
« on: July 17, 2016, 01:58:13 PM »
I'll be getting about 10k next week and will use the entire amount to max out the roth IRA's for both me and my husband for 2016.  Should I just throw the 5k in each of our accounts and into index funds or would you say divide it up and invest 1k for 5 months or something like that?



Thanks

MDM

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Re: Should I invest my annual roth IRA all at once?
« Reply #1 on: July 17, 2016, 06:01:37 PM »
I'll be getting about 10k next week and will use the entire amount to max out the roth IRA's for both me and my husband for 2016.  Should I just throw the 5k in each of our accounts and into index funds or would you say divide it up and invest 1k for 5 months or something like that?
Either is defensible.  Five months from now you can look back and see what would have been best. ;)

See http://www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work for more historical information.

Metric Mouse

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Re: Should I invest my annual roth IRA all at once?
« Reply #2 on: July 17, 2016, 06:59:51 PM »
I would say lump it. But neither is wrong. Good luck!

beastykato

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Re: Should I invest my annual roth IRA all at once?
« Reply #3 on: July 17, 2016, 07:19:34 PM »
I'll get flamed on this board for saying this, but I would avoid doing a lump sum at this point in time.  It seems overall the general consensus is the more the time the money has to work for you the better.  However, IMO, the markets are at an all time high, the election is coming up, and a interest rate hike is expected in December.  I think you'll catch a few dips on some of that news if you dollar cost average it in over the next 6 months or so.  Just my opinion, plus you'll have some extra cash in case anything comes up in that time.
« Last Edit: July 17, 2016, 07:22:52 PM by beastykato »

seattlecyclone

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Re: Should I invest my annual roth IRA all at once?
« Reply #4 on: July 17, 2016, 07:38:08 PM »
I'll get flamed on this board for saying this, but I would avoid doing a lump sum at this point in time.  It seems overall the general consensus is the more the time the money has to work for you the better.  However, IMO, the markets are at an all time high, the election is coming up, and a interest rate hike is expected in December.  I think you'll catch a few dips on some of that news if you dollar cost average it in over the next 6 months or so.  Just my opinion, plus you'll have some extra cash in case anything comes up in that time.

The markets are at an all-time high most of the time. That's the very nature of a market that usually goes up. As to interest rates, I remember buying a house six years ago and everyone at the time was saying that interest rates had nowhere to go but up, and an increase was coming real soon now, and we should take advantage of the low rates while we could. Rates have not gone up. They certainly could go up in the near future, but I'm not holding my breath any more now than I was six years ago.

The answer to the original question is that investing all at once turns out to be better, more often than not, than investing gradually over the course of a year. You'll be making IRA contributions for several years. Make a habit out of contributing as early as possible and you'll likely come out ahead even if you have a few years where waiting would have been the best course of action that year.

beastykato

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Re: Should I invest my annual roth IRA all at once?
« Reply #5 on: July 17, 2016, 07:46:45 PM »
As I said, my opinion, and I knew it would get that sort of response. 

Although, the fed already raised rates at the beginning of the year.  Small hike and the next will probably be small too.  It scared the market in the early year for a while and I suspect the next one will too.

Either way as others have pointed out lump or DCA it all works out in the end.  There are examples where Lump>DCA and there are examples where DCA>Lump.  I think DCA will win at the present time.

Paul der Krake

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Re: Should I invest my annual roth IRA all at once?
« Reply #6 on: July 17, 2016, 08:03:48 PM »
$5,500 or even $11,000 is too small a sum to worry about dollar cost averaging. It might mean a lot to you now if you're just starting out, but that's missing the point that you already are averaging by contributing every year for decades.

Whichever way you choose, resist the urge to draw conclusions 6 months from now.

Metric Mouse

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Re: Should I invest my annual roth IRA all at once?
« Reply #7 on: July 17, 2016, 08:14:24 PM »

Whichever way you choose, resist the urge to draw conclusions 6 months from now.

This is very sound advice, and worth repeating.

seattlecyclone

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Re: Should I invest my annual roth IRA all at once?
« Reply #8 on: July 17, 2016, 09:02:22 PM »
Either way as others have pointed out lump or DCA it all works out in the end.  There are examples where Lump>DCA and there are examples where DCA>Lump.  I think DCA will win at the present time.

If you honestly believe the market will probably go up this year, the best thing to do is to contribute as soon as possible. If you honestly believe the market will probably go down, the best thing to do is to save up until the end of the year before investing at all.

Spreading your purchases out (when you have the cash available to invest in a lump sum) is never the best thing. If you do this you're just hedging your bets, saying you don't know whether the market will go up or down, you believe each outcome to be equally likely, so you may as well spread it out a bit so that you don't get unlucky and put all of your money in at the low point.

The flaw in this logic is that rising and falling are not equally likely! In any given year, either one can happen, and neither one should be a big surprise. However the reason we invest at all is because we honestly expect our investments to go up more often than not. Invest each year as soon as possible. Compared to delaying your contributions until later in the year, you'll win some years and you'll lose some years. However the probability of losing more years than winning over the course of your investing lifetime is extremely remote. So if you have a crystal ball that can tell you that this year really is going to be a losing year with any certainty, go ahead and use it. If not, trust that time in market beats timing the market most of the time and quit worrying about short-term movements.