Author Topic: Lump sum to invest - should I spread my purchases out?  (Read 2983 times)

theadvicist

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Lump sum to invest - should I spread my purchases out?
« on: February 16, 2017, 04:32:09 AM »
So I have just made a lump-sum contribution to my retirement pot (SIPP, I'm in the UK). Due to the nature of my earnings going up and down, towards the end of the tax year I work out how much to contribute for maximum tax relief. I can't / don't do it monthly because there is always a chance I won't earn enough to make it worthwhile.

Anyway, I now have 17k sitting in my account. I know I shouldn't try to time the market. But I can't help noticing how high it is. At the same time I've seen advice that for large amounts you should invest say 2k on a set date each month until it is all invested.

Any wise words or face punches for me? TIA.

2Birds1Stone

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #1 on: February 16, 2017, 04:38:59 AM »
I was in a very similar boat recently. I spread the funds in over the course of two months.....in hindsight I should have just tossed it in all at once.

Hoosier Daddy

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #2 on: February 16, 2017, 04:49:17 AM »
My opinion: When you invest, you must diversify. To properly diversify, you need to spread your investments across asset classes, markets and time. Time is critical. I can't remember the exact years but sometime in the early 2000s began the "lost decade" where if you invested all your money at the beginning of that period and waited ten years, you had a 0% return over that decade. However, if you invested every month over that same decade, you would have done well because you make money from volatility. You should always spread investments out overtime.

Mr Mark

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #3 on: February 16, 2017, 05:04:54 AM »
I know I shouldn't try to time the market.
Really? It sounds a lot like you are trying to time the market. Remember as markets rise steadily if spasmodically over time, it spends an awful lot of those times at 'all time highs'. The market will go up and down , with ups on average more often than downs. No one seems able to predict it consistently.

Any wise words or face punches for me? TIA.

OK. "The best time to invest was yesterday. Second best time is today." Every day you are losing dividends from 1000s of companies you didn't own and inflation is eroding your 'stach like a nest of rats in a granary.

Grab all the tax benefits and matches you can, Index according to your AA, compound/DRIP, and get on with saving more green soldiers and enjoying life.

teamzissou00

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #4 on: February 16, 2017, 01:59:07 PM »
I get this....but....

I just took my 401k money into a self directed account - and need to put it in index funds.  I don't want to keep it in cash for a year, buying each month.

cheapass

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #5 on: February 16, 2017, 02:06:24 PM »
You should always spread investments out overtime.

Not necessarily. If you are investing with a buy and hold strategy (as most of us are) you are operating under the premise that the market generally moves upward in the long term. With that being said, if you could dump all of your investments for the year in on Jan 1, rather than spacing them out throughout the year, you would end up with a greater yield due to the longer amount of time the money is invested. It can be easily proven that *on average* investing early in the year beats spreading it out.

Time in the market beats timing the market. Invest as much as you can as early as you can.
« Last Edit: February 16, 2017, 02:28:51 PM by cheapass »

moof

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #6 on: February 16, 2017, 02:20:40 PM »
17k should be a small part of your final portfolio, like just 2% say, or that ballpark.  So if you mess up by buying RIGHT NOW and things drop 10% tomorrow, your mistake costs you 10% of 2%, or 0.2% of your total portfolio.

You will be buying many other lots over the coming years, so timing related ups/downs should mostly average out, and if you buy early you capture as much of the average growth as possible.  If you fret and sit on money on average of a couple month to spread it out you lock in about 1% overall average growth (2/12*6-7%).  So is locking in 1% less portfolio worth it to possibly avoid losing 0.2% this year?

Finally, the biggest risk is that something comes up, and you end up spending some of that money instead of investing is because it burned a hole in your pocket.  Then you lock in a 2% hit.

If you are so freaked out about the market being frothy or some such, so much so that you don't trust the market with your latest contribution, then why do you trust it with your older contributions?  Only if I was convinced things were really going in the dumper would I not invest, and I would use the EXACT same logic to pull out ALL my money and stick it in apocalyptic style investments like cash/gold/guns/ammo/TP/etc.
« Last Edit: February 16, 2017, 02:25:02 PM by moof »

Guide2003

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #7 on: February 16, 2017, 05:12:16 PM »
I know Betterment isn't real popular right now, but the folks over there have some math and stats to show that it's better (at least on tax advantaged accounts) to drop the money in ASAP (link below). As stated above, the premise of buy and hold is that the market always goes up over time, which means it will be more expensive. When I've had the money, I've always dropped it in immediately. If I don't have a chunk, I console myself with the dollar cost averaging benefit of contributing out of my paychecks (and the fact that I don't have cash sitting around doing nothing!).

https://www.betterment.com/resources/retirement/401ks-and-iras/early-ira-contribution/

2Birds1Stone

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #8 on: February 16, 2017, 06:43:10 PM »
My opinion: When you invest, you must diversify. To properly diversify, you need to spread your investments across asset classes, markets and time. Time is critical. I can't remember the exact years but sometime in the early 2000s began the "lost decade" where if you invested all your money at the beginning of that period and waited ten years, you had a 0% return over that decade. However, if you invested every month over that same decade, you would have done well because you make money from volatility. You should always spread investments out overtime.

This is inherently false. You may be able to cherry pick one 10 year period to make a point, but in the grand scheme of things lump sum investments outperform DCA very significantly.

theadvicist

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #9 on: February 17, 2017, 02:09:09 AM »
I've invested it all. I did consider Hoosier Daddy's point, but I decided since it's not my whole portfolio, only a fraction of it, the lost decade, even if it did happen, wouldn't be catastrophic.

Thanks everyone.

Hoosier Daddy

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #10 on: February 18, 2017, 07:37:50 AM »
My opinion: When you invest, you must diversify. To properly diversify, you need to spread your investments across asset classes, markets and time. Time is critical. I can't remember the exact years but sometime in the early 2000s began the "lost decade" where if you invested all your money at the beginning of that period and waited ten years, you had a 0% return over that decade. However, if you invested every month over that same decade, you would have done well because you make money from volatility. You should always spread investments out overtime.

This is inherently false. You may be able to cherry pick one 10 year period to make a point, but in the grand scheme of things lump sum investments outperform DCA very significantly.

It's called dollar cost averaging. Yes you could outperform by buying only apple stock 10 years ago, but that's with perfect information. You diversify because you don't know the future and you must prepare for all scenarios. One scenario is a zero net growth overtime (especially as our country is more developed, its overall growth may stunt in our life times) but investing across time is how you still make money from the volatility even though your investing in a "flat" market.


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Mr Mark

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #11 on: February 18, 2017, 07:53:59 AM »
My opinion: When you invest, you must diversify. To properly diversify, you need to spread your investments across asset classes, markets and time. Time is critical. I can't remember the exact years but sometime in the early 2000s began the "lost decade" where if you invested all your money at the beginning of that period and waited ten years, you had a 0% return over that decade. However, if you invested every month over that same decade, you would have done well because you make money from volatility. You should always spread investments out overtime.

This is inherently false. You may be able to cherry pick one 10 year period to make a point, but in the grand scheme of things lump sum investments outperform DCA very significantly.

It's called dollar cost averaging. Yes you could outperform by buying only apple stock 10 years ago, but that's with perfect information. You diversify because you don't know the future and you must prepare for all scenarios. One scenario is a zero net growth overtime (especially as our country is more developed, its overall growth may stunt in our life times) but investing across time is how you still make money from the volatility even though your investing in a "flat" market.


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Err no. At current interest rates cash loses money. Once you are invested dca is just regularly putting your cash into the market. That is not the same as keeping a heap of cash waiting. That's market timing. And probably loses money vs dropping it all in.

PhysicianOnFIRE

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #12 on: February 18, 2017, 10:51:41 AM »
Front-loading the lump sum will work out in your favor more often than not. You made a smart move, but we'll only know if it was the right move in hindsight.

NorthernBlitz

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Re: Lump sum to invest - should I spread my purchases out?
« Reply #13 on: February 19, 2017, 09:16:14 AM »
The argument I've heard is this:

The market goes up 70% of the time. So, a lump sum investment is going to be better 70% of the time and worse 30% of the time. You can't know what camp you're in in the moment, but it's not a coin flip because one outcome is expected to win more often than the other.

But, picking the lump sum may be easier to do in theory than practice. If doing a lump sum makes you nervous so that you put off investing the money for a long time while you build up the courage to put it in, it's probably better to DCA it in over some time frame.

Either way, if you're investing it for the long term it probably doesn't really matter too much which option you choose. Also, you're probably investing for the long term even if you retire tomorrow, because you'll need the money for the rest of your life.