Author Topic: Investing a Lump Sum - Have We Been Doing It Wrong?  (Read 8112 times)

GrowingTheGreen

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Investing a Lump Sum - Have We Been Doing It Wrong?
« on: March 06, 2016, 09:29:51 AM »
I stumbled across a fantastic article from Vanguard: https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf

The thesis of the article is that if you come across a lump sum (gift, inheritance, bonus, etc.), it is almost always better (66% of the time) to invest it immediately instead of trying to dollar-cost-average it out over a period between 6 and 36 months.

From the arcticle:
Quote
To some readers, our research may seem to discount the benefits of dollar-cost averaging often cited in popular financial commentary.

Such articles tend to recommend DCA largely on the ground that investing a consistent dollar amount at regular intervals allows investors to diversify the prices they pay for a security, buying more shares when prices are low and fewer when prices are high.

This is true, but there is a notable distinction between DCA as commonly discussed and as a subject for the research covered in this paper. Most popular commentary addresses DCA in terms of consistent investments made using current income—i.e., an employee transferring a portion of each paycheck into a retirement account. In that case, investable cash becomes available only in relatively small amounts over time, which makes DCA a prudent way to invest (and really the only sound alternative to accumulating that money in cash and then actively trying to time the market at some later point).

Our research, in contrast, focuses on the strategies for investing an immediately available large sum of money. Here, the average performance results have favored lump-sum investing.

Ready.  Set.  Discuss!

dontwannaworkforever

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #1 on: March 06, 2016, 09:39:15 AM »
Just off the top of my head (without breaking down some financial calculations) I would have to agree....If you have a large sum of money why not invest it right away? You can't time the market.

For instance, lets say you wait 6 months for the market to drop to invest this lump sum of money. During those 6 months, the market could potentially go up. The actual dollar amount of the lump sum actually decreases over the 6 months due to inflation and you miss out on whatever interest and dividends could have been gained during that time (basically time value of money).

Assuming an inflation rate of 1.5% over 6 months and if the market gains 2% as well in this time frame, you're already looking at a gain of 3.5% if you invest the lump sum right away.


seattlecyclone

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #2 on: March 06, 2016, 09:40:08 AM »
Yes, this is nothing new.

Think about it: if the market is on its way up, the best thing to do is invest as much as possible right now. If the market is on its way down, the best thing to do is invest nothing now, waiting until prices hit bottom. Dollar-cost averaging relies on the assumption that you have no way of knowing what will happen in the market, so you might as well invest some now and some later. This assumption only works if the market goes up just as often as it goes down. This isn't the case! The market goes up more often than it goes down, therefore investing a lump sum immediately will be the best thing more often than not.

ransom132

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #3 on: March 06, 2016, 09:44:00 AM »
Stats or not, If I have the money to invest now, I invest it now.

protostache

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #4 on: March 06, 2016, 09:46:56 AM »
Stats or not, If I have the money to invest now, I invest it now.

Right. What most people do around here isn't actually dollar cost averaging, it's really a series of lump sump investments as cash flows in. DCA is where you already have the cash, gradually buying in to average out your cost basis.

patrickza

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #5 on: March 06, 2016, 12:19:50 PM »
I just did the research myself for a recent blog post (http://investorchallenge.co.za/should-you-be-dollar-cost-averaging/), but yeah, it's pretty clear, go all in as soon as you can for the best possible returns.

StressLess

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #6 on: March 06, 2016, 08:00:55 PM »
I think one thing I would consider is how much the windfall is in relation to my current portfolio

<25% - I think i would be able to put it in straight away without second guessing

=25%-50% - I would probably put it in but be worried about some kind of correction soon after

>50% - I would probably do most as a lump sum and look at DCA a good portion in.

I agree that lump sum investing is better in the long run, but also believe that psychology of investing and being able to stick to your IPS is also very important.  In fact, im going to update mine to include a section regarding windfalls now!!!


Tjat

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #7 on: March 07, 2016, 07:12:40 AM »
The white paper gets into this, but beyond the "Average" return of LSI or DCA, downside risk must be analyzed. On one hand, if you DCA a windfall, your portfolio becomes dramatically more conservative than pre-windfall. However, LSI exposes you to very high nominal dollar risk and psychological worry. If a windfall brings you all the way to FI, do you by nature become more conservative? Logically, you're no longer in accumulation mode so I think you would.

soccerluvof4

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #8 on: March 07, 2016, 09:49:18 AM »
I struggled with this not that long ago and said i would DCA it all in over 12 months. After a period of time and the 10% decline I put about 80% in so I could live the next couple years off the cash. Whatever i read did show the best time is now so I after constantly playing this game went with that as i said. Remember if the market goes down you dont lose the money unless you sell and you still collect your dividends. Alot of variables as to time of investment , your ability to cope with market changes etc..

MishMash

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #9 on: March 07, 2016, 10:36:46 AM »
Ha! I needed this, we have a Fireable amount (in most peoples cases) in cash right now and it's been killing me if we should DCA or just toss it all in right now.  I wish we had it a month or two ago, then I think I wouldn't of had an issue dumping it all into funds.

RWD

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BFGirl

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #11 on: March 07, 2016, 12:21:10 PM »
Ha! I needed this, we have a Fireable amount (in most peoples cases) in cash right now and it's been killing me if we should DCA or just toss it all in right now.  I wish we had it a month or two ago, then I think I wouldn't of had an issue dumping it all into funds.

I was in a similar situation about 18 months ago.  I invested it all over about a 4-5 month period.  It was a lot easier on me psychologically. 

PARedbeard

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #12 on: March 07, 2016, 12:30:53 PM »
What's the old adage? "Time in the market beats timing the market." I live by these words.

Kaspian

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #13 on: March 09, 2016, 09:11:59 PM »
It's weird when people do articles on lump sum vs DCA.  How the hell often do people come into a lump some for Godssakes?  Every 10-20 years or something?  DCA is what most people do because they get a paycheck every two weeks--it's better to take it off the top that way than do something silly like save it all for a year and invest at once in a "lump sum".  And yeah, granted--getting an inheritance and then dribbling it into the market isn't cool.  But meh, if it lets some people sleep at night then fine.

zephyr911

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #14 on: March 09, 2016, 09:42:45 PM »
66% is far from "almost always". In fact, it's 2x closer to "half the time" than it is to "always". That is ambiguous enough to merit a discussion of how one might distinguish conditions favoring lump-sum from conditions favoring DCA.

Not that I'd ever sit on cash. I can always find something worth investing in, right now. I usually have a list.

BlueHouse

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #15 on: March 10, 2016, 04:17:07 AM »
It's weird when people do articles on lump sum vs DCA.  How the hell often do people come into a lump some for Godssakes?  Every 10-20 years or something?  DCA is what most people do because they get a paycheck every two weeks--it's better to take it off the top that way than do something silly like save it all for a year and invest at once in a "lump sum".  And yeah, granted--getting an inheritance and then dribbling it into the market isn't cool.  But meh, if it lets some people sleep at night then fine.
I get a lump sum of 28-30k each year as a 401k max profit share (employer match up to max). Not quite an inheritance, but more than a drop in the bucket to me!  At that time of year, I usually change my future contributions to the MM fund until the cash hits my account. Then I move it into index or mutual funds over the course of weeks or months based on how the funds look. (If it's trading at its 52 -week high, I hold off on buying or start drizzling it in slowly).

MishMash

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #16 on: March 10, 2016, 06:13:25 AM »
We usually get a lump sum bonus from my job once a year, 5 figures so large but not huge, that I have no problem putting into index's at the moment it's received.  This year though is a whole different beast since we have mid/high range 6 figures in cash at the moment and will be receiving 2 more 6 figure amounts this coming year due to the sale of some properties.  I have absolutely the worst luck in the world (literally, it's bad enough that people that know me joke I'm cursed) so I am just having a seriously hard time wrapping my brain around dumping it all in at once because knowing my luck...markets will crater the day after ;-)  We have an appointment with a Financial planner next week to try and sway my fears, maybe hearing it from someone else will help

zephyr911

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #17 on: March 10, 2016, 08:47:27 AM »
We usually get a lump sum bonus from my job once a year, 5 figures so large but not huge, that I have no problem putting into index's at the moment it's received.  This year though is a whole different beast since we have mid/high range 6 figures in cash at the moment and will be receiving 2 more 6 figure amounts this coming year due to the sale of some properties.  I have absolutely the worst luck in the world (literally, it's bad enough that people that know me joke I'm cursed) so I am just having a seriously hard time wrapping my brain around dumping it all in at once because knowing my luck...markets will crater the day after ;-)  We have an appointment with a Financial planner next week to try and sway my fears, maybe hearing it from someone else will help
And on the plus side, after they take their cut, your lump sum won't be so big, and you can fret less about blowing it all on a bad AA.

MishMash

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #18 on: March 10, 2016, 09:37:30 AM »
We usually get a lump sum bonus from my job once a year, 5 figures so large but not huge, that I have no problem putting into index's at the moment it's received.  This year though is a whole different beast since we have mid/high range 6 figures in cash at the moment and will be receiving 2 more 6 figure amounts this coming year due to the sale of some properties.  I have absolutely the worst luck in the world (literally, it's bad enough that people that know me joke I'm cursed) so I am just having a seriously hard time wrapping my brain around dumping it all in at once because knowing my luck...markets will crater the day after ;-)  We have an appointment with a Financial planner next week to try and sway my fears, maybe hearing it from someone else will help
And on the plus side, after they take their cut, your lump sum won't be so big, and you can fret less about blowing it all on a bad AA.

Nah, it's literally one of the ask a CFP meetings that is included with Vanguards Voyager Select perks.  We've been clear we aren't interested in the active management component and that we just want a written financial plan.  However we are ready to turn down the inevitable pitch, and the subsequent "why don't you move your other assets from Schwab for increased status" schpeel

Kaspian

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #19 on: March 11, 2016, 01:54:42 PM »
We usually get a lump sum bonus from my job once a year, 5 figures so large but not huge, that I have no problem putting into index's at the moment it's received.  This year though is a whole different beast since we have mid/high range 6 figures in cash at the moment and will be receiving 2 more 6 figure amounts this coming year due to the sale of some properties.  I have absolutely the worst luck in the world (literally, it's bad enough that people that know me joke I'm cursed) so I am just having a seriously hard time wrapping my brain around dumping it all in at once because knowing my luck...markets will crater the day after ;-)  We have an appointment with a Financial planner next week to try and sway my fears, maybe hearing it from someone else will help

It seems to happen to me too!  Even with my DCA it seems every second Monday (when the transaction happens) the market is up just like clockwork.  Haha...  But I know the same would happen if I switched the day to a Thursday or Wednesday.  (Yep, my DCA buy time affects the entire world markets!)  Anyway....  I seems to work--catching part the entire flow trend. 

onlykelsey

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #20 on: March 11, 2016, 02:13:48 PM »
That's always been sort of intuitive to me.  Obviously DCA is great if you're investing money coming from paychecks or rental income, but if you get a lump sum, the more time you have it sitting in the market, the better. 

Of course you could put it in at all time highs and lose out, but on average, it makes sense that you'd win for the same reasons the 4% rule works, I think.

Curbside Prophet

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #21 on: March 11, 2016, 07:08:09 PM »
We usually get a lump sum bonus from my job once a year, 5 figures so large but not huge, that I have no problem putting into index's at the moment it's received.  This year though is a whole different beast since we have mid/high range 6 figures in cash at the moment and will be receiving 2 more 6 figure amounts this coming year due to the sale of some properties.  I have absolutely the worst luck in the world (literally, it's bad enough that people that know me joke I'm cursed) so I am just having a seriously hard time wrapping my brain around dumping it all in at once because knowing my luck...markets will crater the day after ;-)  We have an appointment with a Financial planner next week to try and sway my fears, maybe hearing it from someone else will help

You get annual bonuses of at least $10k (probably much higher but lets be conservative), have $500k-$750k in CASH and are receiving at least another $200k this year but you think you have the "worst luck in the world."  Lol.

Let me guess, you're also tired of clogging your toilet when you crap bars of gold? 

mrpercentage

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #22 on: March 11, 2016, 08:00:16 PM »
Cramer quoted Warren the other day and its fitting here:

"There are no called strikes in this game."

You might miss a rally. So what. You will miss every great opportunity if you are always 100% invested. Unless of course you are sitting in all great opportunities. If you don't want to watch the markets then go ahead toss it in-- or DCA the sum in at a regular disciplined interval.

you might want to consider this stock master's wisdom
https://youtu.be/KnhamPnvXuQ?t=6s

MishMash

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #23 on: March 14, 2016, 07:14:47 AM »
We usually get a lump sum bonus from my job once a year, 5 figures so large but not huge, that I have no problem putting into index's at the moment it's received.  This year though is a whole different beast since we have mid/high range 6 figures in cash at the moment and will be receiving 2 more 6 figure amounts this coming year due to the sale of some properties.  I have absolutely the worst luck in the world (literally, it's bad enough that people that know me joke I'm cursed) so I am just having a seriously hard time wrapping my brain around dumping it all in at once because knowing my luck...markets will crater the day after ;-)  We have an appointment with a Financial planner next week to try and sway my fears, maybe hearing it from someone else will help

You get annual bonuses of at least $10k (probably much higher but lets be conservative), have $500k-$750k in CASH and are receiving at least another $200k this year but you think you have the "worst luck in the world."  Lol.

Let me guess, you're also tired of clogging your toilet when you crap bars of gold?

Instead of being nasty why don't you stop and think how one could come about to sitting on mid/high range 6 figures in cash.  Oh yea...because someone DIED.  In 2015 my father was killed in a car accident, my mother was severely and permanently injured in the same accident, and my grandfather passed of sudden liver failure on the same day my good friend shot and killed himself.  That's just a teeny look into our 2015, I assure you there was a crap ton more. 

I get 5 figure bonuses because my job is a soul sucking nightmare and that's how they try and get people to stick around and the future funds from the houses....they came from YEARS and YEARS of planning and hard work, not luck.

I'd give back everything that we currently have to have those people back in my life...money doesn't always equate to good luck so instead of assuming that someone is "lucky" because they have cash, why don't you stop for a second next time and think that it could be the result of a negative event, or the result of years of hard work and dedication.


I'm a red panda

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #24 on: March 14, 2016, 07:42:59 AM »
We started off in the market by lump sum investing.  Didn't work out well for my internationals, as they promptly crashed... but maybe in 20 years it will work out.

I thought DCA is a good strategy to continue buying into the market (vs timing) -but that if you have a lot, holding onto it to DCA doesn't make sense.

If I come into a large sum (seems unlikely I don't have an inheritance) I'd invest in a chunk.

tyir

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Re: Investing a Lump Sum - Have We Been Doing It Wrong?
« Reply #25 on: March 14, 2016, 11:13:10 PM »
The simplest argument against DCA a windfall is the following thought experiment:

You have 1M cash. You are a avid believer in DCAing, so you dutifully split it into chunks and buy stock every month for 2 years. Finally at the end you are all stock. The next day, your cat jumps on your keyboard and whoops! He hit the sell button and you are back in all cash. As a true believer in not putting your money from cash into stock in one shot, you resume the DCA.

Clearly this doesn't make much sense. The stock market can drop immediately after you finish your careful DCA, DCA is a physiological trick to play on yourself. 

If you really want to DCA, it probably means your risk tolerance is too low for your portfolio.