Author Topic: Initial funding strategy for index investing w/ $200k in cash  (Read 10825 times)

Badass by 41

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Initial funding strategy for index investing w/ $200k in cash
« on: February 19, 2014, 11:36:44 PM »
Hi all,

I've done my best to try and find similar topics, so my apologies if this has already been covered.

I'm just getting started on my path to Mustachianism and while all of the index fund advice makes perfect sense to me, I'm not sure about the best strategy for funding my initial investments.

I have $200k in cash which I would like to invest in a series of vanguard funds.  Should I...

a) Open the funds with a lump sum deposit?
b) Distribute the $200k across multiple deposits? And if so, what would a recommended distribution amount and duration be?

Thanks for helping out.

Cheers
- James

Will

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #1 on: February 19, 2014, 11:42:26 PM »
Hi all,

I've done my best to try and find similar topics, so my apologies if this has already been covered.

I'm just getting started on my path to Mustachianism and while all of the index fund advice makes perfect sense to me, I'm not sure about the best strategy for funding my initial investments.

I have $200k in cash which I would like to invest in a series of vanguard funds.  Should I...

a) Open the funds with a lump sum deposit?
b) Distribute the $200k across multiple deposits? And if so, what would a recommended distribution amount and duration be?

Thanks for helping out.

Cheers
- James

a) Yes.
b) What would be the point of doing that?

dragoncar

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Badass by 41

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #3 on: February 20, 2014, 01:27:53 AM »
Will, dragoncar hit the nail on the head.  Dollar cost averaging vs. lump sum.

Thanks dragoncar! I'll check out those links and get back to this thread with any questions.

seeking_north

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #4 on: February 20, 2014, 03:52:02 AM »
Nice Badass!

I just opend a account myself, to ask this question. Here is my dilema.


I have $250K, ready to invest. My problem is , we are making extra downpayments on our house so that it will be paid of in 5 years. During that time, I wont have available fund to contribute more each month.

So what would be better for me.. invest it, DCA over 5 years? Then when our home is payed of, I can start investing again each month.

Or should I just DCA over 2-3 years and not make any contributions aftherwards.


( Reason I am worried, is after this last years massive 20-30% gain.. that sounds awfull much, and not sure the stock markets are able to sustain it )

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #5 on: February 20, 2014, 07:31:27 AM »
( Reason I am worried, is after this last years massive 20-30% gain.. that sounds awfull much, and not sure the stock markets are able to sustain it )

Maybe it will, maybe it won't. Nobody knows. And presumably you'll have some international allocation too, which has been doing poorly lately (compared to the US, especially EM) so maybe that will give 20% gains which you'd miss out on, who knows.

Logically I don't see much point of DCA, especially if you have decade or more to retirement. If you need the money in 3 years then maybe. Perhaps emotionally it's better, but I don't think that's a good reason to do it. Stretching the investments out over 2-3 years (with potentially lost gains) seem like a long time to me. But do whatever makes you comfortable obviously.

Will

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #6 on: February 20, 2014, 07:41:25 AM »
Will, dragoncar hit the nail on the head.  Dollar cost averaging vs. lump sum.

Thanks dragoncar! I'll check out those links and get back to this thread with any questions.

You missed the point:  Why would you want to to DCA?  I saw nothing in dragoncar's linked articles suggesting it was a good idea, so why do you want to do it instead of LS?

seeking_north

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #7 on: February 20, 2014, 08:04:25 AM »
Will: You lump sum in now, when 4 months in, the stock market reacts to ending of QE, and falls 15% per annum for the next 2 years, before slowly rising again.

Still want to lump sum?

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #8 on: February 20, 2014, 08:07:11 AM »
If everybody already knows that QE is going to end, then the market already reacted to it. If you want to beat the lump sum strategy, you have to know something that other people either don't know, or won't correctly act on.

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #9 on: February 20, 2014, 08:16:09 AM »
If everybody already knows that QE is going to end, then the market already reacted to it. If you want to beat the lump sum strategy, you have to know something that other people either don't know, or won't correctly act on.

Or get lucky.

Odds are against you though.
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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #10 on: February 20, 2014, 08:18:34 AM »
Will: You lump sum in now, when 4 months in, the stock market reacts to ending of QE, and falls 15% per annum for the next 2 years, before slowly rising again.

Still want to lump sum?

Yeah because I'm not investing for a two year time frame.

warfreak2

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #11 on: February 20, 2014, 08:24:43 AM »
Or get lucky.

Odds are against you though.
Yes, I guess so. I'm a mathematician so when I say "beat a strategy" I mean get a higher expected value than it, rather than get a better outcome in one particular set of circumstances. If someone wins the lottery, their lottery strategy still wasn't better than mine.

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #12 on: February 20, 2014, 08:38:06 AM »
Will: You lump sum in now, when 4 months in, the stock market reacts to ending of QE, and falls 15% per annum for the next 2 years, before slowly rising again.

Still want to lump sum?

Imagine that your friend has $200k invested in the stock market.  Would you advise him to sell all his stock and then buy it back over the next two years? That's functionally equivalent to DCA.

I get the emotional appeal (avoiding remorse if things go south), but it's tough to defend.

arebelspy

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #13 on: February 20, 2014, 08:51:06 AM »
Or get lucky.

Odds are against you though.
Yes, I guess so. I'm a mathematician so when I say "beat a strategy" I mean get a higher expected value than it, rather than get a better outcome in one particular set of circumstances. If someone wins the lottery, their lottery strategy still wasn't better than mine.

Agreed.

Will: You lump sum in now, when 4 months in, the stock market reacts to ending of QE, and falls 15% per annum for the next 2 years, before slowly rising again.

Still want to lump sum?

Imagine that your friend has $200k invested in the stock market.  Would you advise him to sell all his stock and then buy it back over the next two years? That's functionally equivalent to DCA.

I get the emotional appeal (avoiding remorse if things go south), but it's tough to defend.

That's an awesome analogy!  I'm totally stealing that. (And adding the caveat that we handwave away any tax liabilities and benefits, e.g. higher cost basis.)

You'd only sell and DCA back in if you knew the market was going down, and thus you should only DCA in if you have the same information.  Absent any specific inside information that isn't already priced in, of course you wouldn't do that.
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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #14 on: February 20, 2014, 09:13:18 AM »
This topic seems to come up a lot and its an ongoing debate. I still stand with DCA in on the parts of your portfolio that are lagging or on declines.  The last 7% decline was an opportunity.  Everyone fees they have stats one way or another and with the internet can make an argument one way or another. Do what your comfortable with but i do agree the sooner you can get all your money working for you the better and also that you cant predict bottoms or tops BUT the market always gives you opportunity's. There are to many variables for anyone to tell someone what to do period!

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #15 on: February 20, 2014, 09:27:54 AM »
I find it interesting that the same people who will recommend asset diversification will recommend lump sum with huge sums (not accusing anyone here).

It's the same trade off here, based on some testing I did.

Lump sum has the higher expected return, but also the higher standard deviation of returns. It's like having 100% stock versus a mixed portfolio. You should use the method that agrees with your level of risk tolerance.

Note that the difference in expected return and standard deviation between lump sum and DCA also depends on how diversified you will be when investing. 100% stock will yield a bigger difference between the two, 50/50 stock/bond will yield a smaller difference.

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #16 on: February 20, 2014, 09:30:51 AM »
I find it interesting that the same people who will recommend asset diversification will recommend lump sum with huge sums (not accusing anyone here).

It's the same trade off here, based on some testing I did.

Lump sum has the higher expected return, but also the higher standard deviation of returns. It's like having 100% stock versus a mixed portfolio. You should use the method that agrees with your level of risk tolerance.

Note that the difference in expected return and standard deviation between lump sum and DCA also depends on how diversified you will be when investing. 100% stock will yield a bigger difference between the two, 50/50 stock/bond will yield a smaller difference.
What is interesting about it? What is the relationship between Asset Allocation and DCA vs. Lump Sum?


I'm not sure you've proven that just by stating it. What testing supports this idea that DCA or not has a similar implication on your portfolio balance that asset allocation does?

seeking_north

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #17 on: February 20, 2014, 10:18:54 AM »

[/quote]

Imagine that your friend has $200k invested in the stock market.  Would you advise him to sell all his stock and then buy it back over the next two years? That's functionally equivalent to DCA.

I get the emotional appeal (avoiding remorse if things go south), but it's tough to defend.
[/quote]

That's an awesome analogy!  I'm totally stealing that. (And adding the caveat that we handwave away any tax liabilities and benefits, e.g. higher cost basis.)

You'd only sell and DCA back in if you knew the market was going down, and thus you should only DCA in if you have the same information.  Absent any specific inside information that isn't already priced in, of course you wouldn't do that.
[/quote]


If that friend invested all of it yesterday, I would.

If he however has built up a portfolio during the last few years, I would not.
I am interested in index fund, which in my country does not pay dividends..  so I would look at a 1-3 year down time pretty intense by my standards, as I am not investing more during ( I`m paying of the house in 5 years ) during that time.

The index funds will reinvest the dividends they recive, but its still a though deal looking at say -20 to 30% loss for that amount of period.



DCA during 2-3 years for the faint of hearts, Lump sum for the optimists... ? :)

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #18 on: February 20, 2014, 10:21:44 AM »
I find it interesting that the same people who will recommend asset diversification will recommend lump sum with huge sums (not accusing anyone here).

It's the same trade off here, based on some testing I did.

Lump sum has the higher expected return, but also the higher standard deviation of returns. It's like having 100% stock versus a mixed portfolio. You should use the method that agrees with your level of risk tolerance.

Note that the difference in expected return and standard deviation between lump sum and DCA also depends on how diversified you will be when investing. 100% stock will yield a bigger difference between the two, 50/50 stock/bond will yield a smaller difference.

I think the implicit assumption is that you lump sum into your target asset allocation, not that you lump sum into a single asset class while neglecting another.

Of course cash will have lower variance than stocks. I don't think that's relevant to the DCA vs lump sum debate though. Your tolerance for variance should be built in to your target asset allocation.

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #19 on: February 20, 2014, 10:28:22 AM »
DCA during 2-3 years for the faint of hearts, Lump sum for the optimists... ? :)

DCA is really just market timing. By DCA'ing, you're implicitly gambling that the average price of the stock market will be lower over the next 2-3 years than it is now. I'm not sure how that gamble is related to intestinal fortitude.

I think the appeal of DCA is closely linked to the concept of loss aversion. Essentially, losses are more painful than equal gains, so people prefer to miss out on some upside in order to avoid the possibility of an unmittigated loss.

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #20 on: February 20, 2014, 11:42:05 AM »
DCA during 2-3 years for the faint of hearts, Lump sum for the optimists... ? :)

DCA is really just market timing. By DCA'ing, you're implicitly gambling that the average price of the stock market will be lower over the next 2-3 years than it is now. I'm not sure how that gamble is related to intestinal fortitude.

Because they don't want to risk a market drop and feeling regretful.

I think the appeal of DCA is closely linked to the concept of loss aversion. Essentially, losses are more painful than equal gains, so people prefer to miss out on some upside in order to avoid the possibility of an unmittigated loss.

Yes, this.  So the "faint of heart" would be those DCAing not because they're predicting the market will be lower, on average, than it is now, but because of the thought of potential losses scaring them from the mathematically optimal answer.
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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #21 on: February 20, 2014, 07:27:50 PM »
Yes, this.  So the "faint of heart" would be those DCAing not because they're predicting the market will be lower, on average, than it is now, but because of the thought of potential losses scaring them from the mathematically optimal answer.

They'll be scared off no matter what even when DCA works in their favor. The "faint of heart" will not be able to DCA over the next 2-3 years if market is falling 20% each year, making DCA the ideal scenario. They will likely wait until the bottom only to miss the boat when the market is 20% higher than if they lump summed at the start. It's a no win situation.
« Last Edit: February 20, 2014, 07:30:56 PM by yahui168 »

arebelspy

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #22 on: February 21, 2014, 07:48:05 AM »
Yes, this.  So the "faint of heart" would be those DCAing not because they're predicting the market will be lower, on average, than it is now, but because of the thought of potential losses scaring them from the mathematically optimal answer.

They'll be scared off no matter what even when DCA works in their favor. The "faint of heart" will not be able to DCA over the next 2-3 years if market is falling 20% each year, making DCA the ideal scenario. They will likely wait until the bottom only to miss the boat when the market is 20% higher than if they lump summed at the start. It's a no win situation.

Touche.
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seeking_north

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #23 on: February 21, 2014, 08:43:05 AM »
Well you could market time it then ;)

When the global markets or S&P500 are falling for 2-3 months, stop DCA, and restart it when you feel a bit more comfortable. The monthly/weekly DCA amounts you have not spent, are lumped sum in then...

Taking a montly DCA, and splitting it up into 4, or 1 a week, you are even less exposed, and its easier to stop beeing pulled into the "sinking market"... requires dispiplin though to start it up again!

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #24 on: February 21, 2014, 09:09:51 AM »
Yes, this.  So the "faint of heart" would be those DCAing not because they're predicting the market will be lower, on average, than it is now, but because of the thought of potential losses scaring them from the mathematically optimal answer.

They'll be scared off no matter what even when DCA works in their favor. The "faint of heart" will not be able to DCA over the next 2-3 years if market is falling 20% each year, making DCA the ideal scenario. They will likely wait until the bottom only to miss the boat when the market is 20% higher than if they lump summed at the start. It's a no win situation.

Touche.

Straw men aside, if you've got a back-tested model that shows that some DCA behavior with an available lump sum has a different variance profile than one-shot investing, that's as legitimate a consideration as asset allocations that don't maximize expected return (based on back testing) because they also consider and value variance.

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #25 on: February 21, 2014, 09:32:29 AM »
This link may be useful in your analysis. http://www.moneychimp.com/features/dollar_cost.htm

Also, I remember reading a MadFientist article discussing DCA vs. lump sum, and the conclusion was that waiting to invest a lump sum bit by bit wasn't better in the long term. This could have been another article, they all seem to run together.

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #26 on: February 21, 2014, 09:40:50 AM »
Straw men aside, if you've got a back-tested model that shows that some DCA behavior with an available lump sum has a different variance profile than one-shot investing, that's as legitimate a consideration as asset allocations that don't maximize expected return (based on back testing) because they also consider and value variance.

Preferences for risk and return should be reflected in portfolio construction, not market timing. Of course a cash heavy portfolio (beginning of DCA) will have lower volatility than a stock heavy one (end of DCA). If you're not comfortable with volatility, perhaps increase your allocation to cash and bonds. But unless you expect your risk tolerance to rise over your DCA period, what defense is there for having a low volatility portfolio on day 1 and a high volatility portfolio at the end of the DCA?

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #27 on: February 21, 2014, 09:57:15 AM »
Straw men aside, if you've got a back-tested model that shows that some DCA behavior with an available lump sum has a different variance profile than one-shot investing, that's as legitimate a consideration as asset allocations that don't maximize expected return (based on back testing) because they also consider and value variance.

Preferences for risk and return should be reflected in portfolio construction, not market timing. Of course a cash heavy portfolio (beginning of DCA) will have lower volatility than a stock heavy one (end of DCA). If you're not comfortable with volatility, perhaps increase your allocation to cash and bonds. But unless you expect your risk tolerance to rise over your DCA period, what defense is there for having a low volatility portfolio on day 1 and a high volatility portfolio at the end of the DCA?

Because the questions of volatility within the portfolio and outcome variance induced by the funding model are independently assessable (to the extent back testing is valid). If two decisions may be made, and you choose to make only one consciously, that doesn't mean you didn't make the other one. So why dismiss back tested outcome assessments on one hand and not the other? I have made no assessment of the funding alternatives, but at least one other poster claims to have done so.

KingCoin

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #28 on: February 21, 2014, 10:33:31 AM »
Because the questions of volatility within the portfolio and outcome variance induced by the funding model are independently assessable (to the extent back testing is valid). If two decisions may be made, and you choose to make only one consciously, that doesn't mean you didn't make the other one. So why dismiss back tested outcome assessments on one hand and not the other? I have made no assessment of the funding alternatives, but at least one other poster claims to have done so.

Yes, but the lower volatility of DCA isn't saying anything non-trivial about DCA. It's simply a direct result of the fact that cash is less volatile than stock. In that way, portfolio volatility and funding model volatility aren't independent at all. In fact, DCA is really just a method of portfolio construction that advocates a diminishing cash position over time. How does such a portfolio make sense? Why is a large cash position good at the beginning of a random period of time but bad at the end of a random period?

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #29 on: February 21, 2014, 10:48:52 AM »
Because the questions of volatility within the portfolio and outcome variance induced by the funding model are independently assessable (to the extent back testing is valid). If two decisions may be made, and you choose to make only one consciously, that doesn't mean you didn't make the other one. So why dismiss back tested outcome assessments on one hand and not the other? I have made no assessment of the funding alternatives, but at least one other poster claims to have done so.

Yes, but the lower volatility of DCA isn't saying anything non-trivial about DCA. It's simply a direct result of the fact that cash is less volatile than stock. In that way, portfolio volatility and funding model volatility aren't independent at all. In fact, DCA is really just a method of portfolio construction that advocates a diminishing cash position over time. How does such a portfolio make sense? Why is a large cash position good at the beginning of a random period of time but bad at the end of a random period?

True to the extent that cash component is the only factor in the variability of the funding outcomes, but shouldn't that be tested or controlled within the observations rather than assumed?

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #30 on: February 21, 2014, 11:19:42 AM »
True to the extent that cash component is the only factor in the variability of the funding outcomes, but shouldn't that be tested or controlled within the observations rather than assumed?

Again, the implicit claim of DCA is that a cash heavy portfolio is good at the beginning of a random period and bad at the end. It's utterly nonsensical. Any back-tested "evidence" would necessarily be a data artifact (or at best be a claim that holding an average cash position is advantageous in portfolio construction). It's akin to arguing that holding cash is good on some days but not other days (maybe using a coin flip to decide what those days should be).

Heck, why not do the exact opposite? Fully invest cash on day 1, then sell shares over the DCA period? That way, if the market falls, you have cash at the end to buy shares! If DCA'ing is better, why not endlessly DCA, liquidating your portfolio and buying it back in an endless cycle? Perhaps over a 5 day period? Perhaps intraday? Why not switch between forward and backward DCA's? If this all sounds ridiculous and random, it's because it is.

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #31 on: February 21, 2014, 11:35:47 AM »
True to the extent that cash component is the only factor in the variability of the funding outcomes, but shouldn't that be tested or controlled within the observations rather than assumed?

Again, the implicit claim of DCA is that a cash heavy portfolio is good at the beginning of a random period and bad at the end. It's utterly nonsensical. Any back-tested "evidence" would necessarily be a data artifact (or at best be a claim that holding an average cash position is advantageous in portfolio construction). It's akin to arguing that holding cash is good on some days but not other days (maybe using a coin flip to decide what those days should be).

Heck, why not do the exact opposite? Fully invest cash on day 1, then sell shares over the DCA period? That way, if the market falls, you have cash at the end to buy shares! If DCA'ing is better, why not endlessly DCA, liquidating your portfolio and buying it back in an endless cycle? Perhaps over a 5 day period? Perhaps intraday? Why not switch between forward and backward DCA's? If this all sounds ridiculous and random, it's because it is.

If you think there's no legitimacy to overweighting avoidance of the outcomes in red in Figure 3 here, I don't think anyone will stop you from making lump-sum investments of your windfalls.
https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf

Will

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #32 on: February 21, 2014, 08:02:30 PM »
That link to the Vanguard study sums things up nicely:

Quote
Clearly, if markets are trending upward, it’s logical
to implement a strategic asset allocation as soon as
possible because it should offer a higher long-run
expected return than cash.
Historically, a long-term upward trend has persisted
for both equities and bonds, probably attributable to
positive risk premia in the markets. In other words,
positive returns have compensated investors for
taking risks, hence the upward trend in those
markets and the resulting probabilities of success for
LSI. So, to the extent that an investor believes the
positive risk premia are likely to exist in the future,
LSI would remain the preferred method for investing
an immediately available large sum of money. But
if the investor is primarily concerned with reducing
short-term downside risk and the potential for regret,
then DCA may be a better alternative.
To be comfortable with either strategy, an investor
must be fully aware of the fact that historical
averages are only a guide—it is still possible for LSI
or DCA to underperform or even lose money in any
given period. If an investor is uncomfortable with the
risks associated with a given market entry strategy,
it may imply a low willingness to take risk in general,
and if so, we recommend revisiting the target asset
allocation to ensure that it appropriately addresses
risk tolerance levels and investing goals.



Badass by 41

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #33 on: February 24, 2014, 03:44:39 PM »
WOW!  Great discussion.  Thanks everyone for chiming in.

dragoncar, your initial link on BH was perfect.  This part of the Vanguard quote is what made the decision for me.

To be comfortable with either strategy, an investor
must be fully aware of the fact that historical
averages are only a guide—it is still possible for LSI
or DCA to underperform or even lose money in any
given period.

Thanks everyone.

KingCoin

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #34 on: February 24, 2014, 03:58:11 PM »
If you think there's no legitimacy to overweighting avoidance of the outcomes in red in Figure 3 here, I don't think anyone will stop you from making lump-sum investments of your windfalls.
https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf

I'm not sure what you mean by legitimacy. All this is saying is that if you invest in cash, you won't lose money when the market falls. I guess that's "legitimate". But if you want to hold cash to avoid market losses, why be fully invested at the end of the DCA period? It doesn't make any sense. The appeal is purely emotional. However, if that's what it takes for someone to get comfortable investing in the market then I say godspeed. Better slowly than never.


MgoSam

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #35 on: February 24, 2014, 11:24:22 PM »
If you're money is sitting in a bank account then it likely is earning very little or no interest at all. If you are worried that the stock market is going to have a plunge in prices in the near future then what might be a good idea to consider is opening a Vanguard account, putting some money into an index stock market fund and then putting the remainder of your money into a  "safer" fund like bonds or short-term investment. This way at least you will get a higher return and then can slowly transfer the money from the bond index fund over to the stock fund. I don't have any particular funds to recommend other than the ones I use, but I am sure that there are other people here that can better advise you on that (I just use the core funds).

But other than that, my impression and from what I have researched (and I know that many here agree with me) is that market timing tends to lead to inferior results than either putting in a lump sum or DCA. That said, there are some savy investors that do hoard cash and wait for opportunities where they can buy stocks or index funds at a very undervalued price. This is either due to temporary flucations that occur a short-term panic (like the Fukushima nuclear plant incident) where nearly all Japanese-based company's stocks went down and then many, such as Sony, went back to normal after a few weeks, or during general market panics such as the one we saw in 2007 and 2008. I do not do this because of the many risks and uncertainty but some people have such an appetite for these risks and uncertainties.

foobar

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Re: Initial funding strategy for index investing w/ $200k in cash
« Reply #36 on: February 26, 2014, 09:35:29 AM »
Do a big lump sum payment on the house (it will really up the % of your payments that go toward principal) and invest in the market.  Now you have money every month to add to your account.

If the market goes up 10%, DCA loses. If the market goes down 10%, DCA wins.  Markets tend to go up so in general the lump sum wins out.

If it was as easy as looking at last years returns to time the market, we would all be rich. Was the 30% last year high? You bet. But the performance over the last 10 years is below average so maybe we still regressing back up to the mean. Or maybe future returns will be lower and we need to regress back down to them. There will be a 15% stock market drop in the future. No one though can tell you if it is going to be starting in now or after the market has gone up another 30%.

Or you could just invest in gold. After it was down like 25% last year. Its due for a rebound right?:)

Nice Badass!

I just opend a account myself, to ask this question. Here is my dilema.


I have $250K, ready to invest. My problem is , we are making extra downpayments on our house so that it will be paid of in 5 years. During that time, I wont have available fund to contribute more each month.

So what would be better for me.. invest it, DCA over 5 years? Then when our home is payed of, I can start investing again each month.

Or should I just DCA over 2-3 years and not make any contributions aftherwards.


( Reason I am worried, is after this last years massive 20-30% gain.. that sounds awfull much, and not sure the stock markets are able to sustain it )