Author Topic: Lump Sum investing question  (Read 4592 times)

fb132

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Lump Sum investing question
« on: July 29, 2015, 08:46:59 PM »
I usually invest whatever leftover money I have at the end of each month (usually it is on average 1K$ per month), but I read on a few websites that in general, lump sum beats out dollar cost average. So mustachians is that really true, if so, what do I do, do I accumulate my money in a high interest account until I reach a certain amount??? Or do I invest every 6 or 12 month while I accumulate my investment money in a high interest account until the moment arrives??? What is the most optimal strategy or does it even matter wether I invest each month or if I invest a huge lump sum once or twice a year?
« Last Edit: July 29, 2015, 08:49:40 PM by fb132 »

rpr

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Re: Lump Sum investing question
« Reply #1 on: July 29, 2015, 08:51:45 PM »
What you are doing presently is correct.

The lump sum versus DCA comes into play only if you already have the money in hand and instead of investing it in one lump sum spread it out over a period of time like say a year.

cdm

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Re: Lump Sum investing question
« Reply #2 on: July 29, 2015, 11:42:32 PM »
There are some thoughts on DCA vs. lump sum at these links:

http://www.financialwisdomforum.org/gummy-stuff/DCA_stuff.htm
http://www.financialwisdomforum.org/gummy-stuff/fund-you.htm
http://www.financialwisdomforum.org/gummy-stuff/DCA_for_masochists.htm

These are Gummy-stuff posts from a retired math professor made in the 90s.
The second post includes a comment about the dark side of DCA. This leads to the conclusion that DCA works if the investment goes down then up rather than up then down.

There is an excel model you can play with at the end of the DCA_for_masochists page.

I believe Gummy's conclusion is still "Invest as soon as you have the money" even though you risk the up/down scenario.

2Birds1Stone

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Re: Lump Sum investing question
« Reply #3 on: July 30, 2015, 01:40:47 AM »
What you are doing presently is correct.

The lump sum versus DCA comes into play only if you already have the money in hand and instead of investing it in one lump sum spread it out over a period of time like say a year.

^ This

halfshellmeijin

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Re: Lump Sum investing question
« Reply #4 on: July 30, 2015, 07:13:30 AM »
I also believe that DCA verses lump sum is in regards to a large sum of money being afforded to you at one time, like an inheritance. So to make the comparison more clear, it would be like either investing the 1k at the end of the month (lump sum), or investing about $250 per week each week for the next month to invest the money (DCA). So what you are doing is right, investing $250 a week is probably also right, saving up to have a large lump sum, say $10k is not right. If you save up the large sum, you miss the potential gains for the ten months. If you think the market will crash during the next ten months and want to try saving up for 10k, then you are trying to time the market and that is not a path to success.

fb132

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Re: Lump Sum investing question
« Reply #5 on: July 30, 2015, 07:37:02 AM »
Ok, I get it now, I must of misread the articles, I think the articles were about like all of you have said when someone gets a huge amount now and considers either to lump sum or dca. Good to know that I was doing the right thing all along.

mrpercentage

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Re: Lump Sum investing question
« Reply #6 on: July 30, 2015, 05:19:19 PM »
I usually invest whatever leftover money I have at the end of each month (usually it is on average 1K$ per month), but I read on a few websites that in general, lump sum beats out dollar cost average. So mustachians is that really true, if so, what do I do, do I accumulate my money in a high interest account until I reach a certain amount??? Or do I invest every 6 or 12 month while I accumulate my investment money in a high interest account until the moment arrives??? What is the most optimal strategy or does it even matter wether I invest each month or if I invest a huge lump sum once or twice a year?
It depends. If you are buying stock from a broker you want to minimize fees so you want to purchase in large chunks. Nay sayers will say you get killed on fees but that is not true. $5,000 with a one time $7 fee is better than 0.48% for life. Especially if you are a dividend growth investor.

Lump sum doesn't have to deal with partial YTD. For example you buy stock a at $5. It goes to $10. Thats a 100% gain. Then you dollar cost average in another purchase. You buy a share at $10. Now you have one at $5 and one at $10, but you still only gained $5, so your return is 33%. You see how that works? You still made just at much money but it looks like you have less of a return. You don't the other money just wasn't invested yet to realize the gains. My Robinhood account suffers from this with a 0.5% YTD while my Scottrade is at 18% YTD.

Dollar cost averaging wins unless you have a lump sum to invest. For example, if you had $30,000 and chose to only invest $2000 a month then you can potentially lose out on a lot of gain. It could keep you from potential losses if you were investing at the wrong time but since the market trends upward I would lean towards invest it now.

fb132

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Re: Lump Sum investing question
« Reply #7 on: July 30, 2015, 06:47:57 PM »
I usually invest whatever leftover money I have at the end of each month (usually it is on average 1K$ per month), but I read on a few websites that in general, lump sum beats out dollar cost average. So mustachians is that really true, if so, what do I do, do I accumulate my money in a high interest account until I reach a certain amount??? Or do I invest every 6 or 12 month while I accumulate my investment money in a high interest account until the moment arrives??? What is the most optimal strategy or does it even matter wether I invest each month or if I invest a huge lump sum once or twice a year?
It depends. If you are buying stock from a broker you want to minimize fees so you want to purchase in large chunks. Nay sayers will say you get killed on fees but that is not true. $5,000 with a one time $7 fee is better than 0.48% for life. Especially if you are a dividend growth investor.

Lump sum doesn't have to deal with partial YTD. For example you buy stock a at $5. It goes to $10. Thats a 100% gain. Then you dollar cost average in another purchase. You buy a share at $10. Now you have one at $5 and one at $10, but you still only gained $5, so your return is 33%. You see how that works? You still made just at much money but it looks like you have less of a return. You don't the other money just wasn't invested yet to realize the gains. My Robinhood account suffers from this with a 0.5% YTD while my Scottrade is at 18% YTD.

Dollar cost averaging wins unless you have a lump sum to invest. For example, if you had $30,000 and chose to only invest $2000 a month then you can potentially lose out on a lot of gain. It could keep you from potential losses if you were investing at the wrong time but since the market trends upward I would lean towards invest it now.
I am with questrade (no ETF fees).

cdm

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Re: Lump Sum investing question
« Reply #8 on: July 31, 2015, 12:33:55 PM »
Quote
I am with questrade (no ETF fees).

The "fee" for no fee ETFs is the bid/ask spread. If you buy and hold it's not a big deal. If you trade in and out you'd want to compare spreads.

fb132

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Re: Lump Sum investing question
« Reply #9 on: July 31, 2015, 02:54:58 PM »
Quote
I am with questrade (no ETF fees).

The "fee" for no fee ETFs is the bid/ask spread. If you buy and hold it's not a big deal. If you trade in and out you'd want to compare spreads.
I am with Vanguard (CCP), I rarely see huge bid/ask spread.

dandarc

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Re: Lump Sum investing question
« Reply #10 on: July 31, 2015, 03:03:33 PM »
fb132 -

The reason lump sum investing is on average better than dollar cost averaging, is because you put your money to work sooner, thus giving it more time to compound.  The market goes up over time, so waiting to invest generally means you pay a higher price.  If you don't have the lump sum today, you are not dollar-cost-averaging.  You are simply investing money as it becomes available.  "Saving up" so that you have a lump sum to invest should, on average under perform investing your money as soon as you have it, for the same reason - you are delaying the investment, so it will have less time to compound.

That is, absent high transaction costs, but you've said you don't have any transaction costs to speak of.

fb132

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Re: Lump Sum investing question
« Reply #11 on: July 31, 2015, 06:56:48 PM »
fb132 -

The reason lump sum investing is on average better than dollar cost averaging, is because you put your money to work sooner, thus giving it more time to compound.  The market goes up over time, so waiting to invest generally means you pay a higher price.  If you don't have the lump sum today, you are not dollar-cost-averaging.  You are simply investing money as it becomes available.  "Saving up" so that you have a lump sum to invest should, on average under perform investing your money as soon as you have it, for the same reason - you are delaying the investment, so it will have less time to compound.

That is, absent high transaction costs, but you've said you don't have any transaction costs to speak of.
The occasional fee I get is when I buy the VCN and VXC ETF's, but it's low, each month, it costs about 0,30$ together which probably comes out to 3 or 4$ per year.

mrpercentage

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Re: Lump Sum investing question
« Reply #12 on: July 31, 2015, 07:57:46 PM »
Another thought on lump sum investing.

With a lump sum you have to be much more selective. That can be beneficial and help avoid impulse purchases when it comes to stock. Since you are doing ETF's most of what I have said in this thread will not apply to you. Just remember that holding cash never really "hurt" anyone. Gains are not real until they are realized.

I keep going back to my Scottrade trade account. It sees the least action of any of my investment accounts. Its returns are the highest and I never feel pressured to watch or move stuff like I do with my Robinhood account. That $7 fee helps curb the desire for a sell. There is a powerful psychological component to seeing your investments at its optimum too.

Dollar cost averaging is hard to gage returns appropriately and usually looks like less effective than it really is. So if you are investing every month you are probably doing better than it looks. I can't stress that enough. Having multiple accounts with different strategies has made me very aware of this.