The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: EdwardMM on April 01, 2017, 04:32:02 PM
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If you find yourself in a position to invest $150,000 in cash at a given point in time (let's say because you just inherited it), is there any merit in trying to "dollar cost average" your investment by spreading out the time you invest it over some months(say, 3 months), or is it statistically better just to immediately invest because the market is generally going up?
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Statistically it is better to lump sum.
Personally I have enough faith in my Asset Allocation to do just that. If I were 100% VTI, I couldn't stomach it and would DCA, but I would be wrong to do so.
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Statistically it is better to go in as soon as you can with everything. Stocks go up 70-odd% of the time.
It's a psychological decision for people as well. Experienced investors who have stomached a drop or two successfully will likely do well going in lumpsum because they have faith in the big market picture.
Newer investors may be better to DCA in the long run; a bad timing incident might cause them to make costly mistakes due to emotional decision making.
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Everyone's responses are right, its statistically better to put it in all at once because the market averages 8-10% up per year and you run the risk of missing on the next 6-12 months of gains.
However, if that $150,000 is a significant portion of your net worth, its probably better to do the lower risk/lower return method of dollar cost averaging over 6-18 months.
There's also a third strategy....called "When the bear shows up, throw money at it until it goes away". Basically invest in chunks on the days the news says "Down down 200+ points! The world is ending"
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This is maybe a good test of your AA. I'd say if you are hesitant then there's by definition something wrong for you with your asset allocation.
Put it into vanguard Wellesley until you've sorted your investment allocation
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http://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
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http://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
Nice. I was just paraphrasing the master... ;-)
But solid advice.
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Some light reading on the matter: https://personal.vanguard.com/pdf/s315.pdf (https://personal.vanguard.com/pdf/s315.pdf)
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Some light reading on the matter: https://personal.vanguard.com/pdf/s315.pdf (https://personal.vanguard.com/pdf/s315.pdf)
Please read this in full, it will answer your question.