My FIRE Plan

[IloveFIRE]

I discovered the ER blog scene about 6 years ago. Since then I've paid off all my non-mortgage related debts, got my budget in order and have saved up a good chunk of money. By my calculations I need about 50K/year in passive income to consider myself FI.

In the past couple of years as my savings balance has grown I've read hundreds if not thousands of articles with advice on how to invest your money. The only thing that accomplished was to paralyze me and led to zero action on my part. My money is still just sitting in a bank account earning .001%. I finally came across the JCollins stock series and it totally clicked for me. I don't agree 100% with his views, particularly his view on investing in some sort of international fun but other than that I'm fully on board. This morning I opened a Vanguard account and as soon as it is fully funded I plan on doing the following:

My net worth is roughly 400K (175K in 401K/IRA and 225K in cash). My asset allocation will be as follows:

•   VTSAX - Total Stock Market Fund 60% - Funds coming from both Taxable Account & 401K
•   XXXXX - Int'l Market Fund 25% (exclude US) - Funds coming from both Taxable Account & 401K
•   XXXXX – China and India Fund 10% - Funds coming from both Taxable Account & 401K
•   VIPSX - TIPS Fund 5% - Traditional IRA
•   Checking Account – Emergency Fund (12 months expenses) - Taxable account. I'm pretty conservative and won't feel comfortable going to far below 12 months. 
 
*The XXXXX means that I haven't researched the name of the fund yet but I'm sure Vanguard offers something along those lines. If you know of a Vanguard fund that you would like to recommend please do so.

1. My plan is to invest roughly 50K each quarter going forward in the above mentioned allocation. I just don't feel comfortable going all in with the 225K cash balance. I know JCollins is against this but I would be devastated if the market took a 10% dive the day after I went all in.
2. My goal as mentioned above is to generate roughly 50K in passive income. My current financial situation allows me to save roughly 110K per year. I plan on investing roughly an additional 80K per year (the remaining 30K I will discuss below) so assuming a return rate of 8% (which  I think is conservative) I should have about 1MM by 2019. The 1MM should provide 50K in passive income assuming a return rate of 8% and 3% of that I would reinvest to account for inflation.
3. The 30K in savings per year that I won't invest in equities I plan on investing in Real Estate. Some of the forum members seem to be doing quite well in this area so it certainly has peeked my interest. Since I have zero experience in this area I'm not going to include this in my passive income just yet. I want to buy a few properties first and see how that goes before I count on this income.

It all sounds so simple, so naturally I have some doubt that I missed something. I will leave it to all of you much smarter people to poke some holes in my plan. 

[ADK_Junkie]

Generally, I think you have a fairly solid plan.  Especially the access to saving/investing $110K annually (I seriously need a pay upgrade).

First, I'd like to recommend two books regarding investing:
1)  The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit by Aswath Damodaran (by far the best out there for serious investors, Prof. Damodaran of NYU is one of the most highly regarded valuation individuals)
2)  The Most Important Thing by Howard Marks (chief of Oaktree Capital).  This book is better for the lay-person, but it really spells out valuable insights to the market and how to generate favorable returns.

Next, regarding your 3-steps:
1)  Dollar cost-averaging is what you are planning here, and yes, it is a million times better than investing the total all at once. Especially in today's market, with everything reaching new highs--> most investors are expecting a correction (just have no idea when.... but if you read Mark's above, bubbles are always driven by cheap money).
2)  Much has been written on this site about the safe-withdrawal-rate ("SWR") of 4% (as opposed to your 5% net assumption).  There are concerns by some that the market will not return historic levels given the current high valuations.  Now, this statement shouldn't change your course of action (saving and investing as much as you can possibly afford for the next five years).... I just think this withdrawal expectation is aggressive and may not enable you to weather a prolonged downturn.  Again, saving and investing (in equities) is your best bet, but I personally am shooting for a 3% to 4% SWR.
3)  Real Estate is tough, it's really a second job, while the cash flow can be extremely positive, there is a lot of risk, and a lot of headache.  Personally, my real estate play is with Vanguard's REIT Index Fund.  This gives me plenty of diversification (i.e., lower risk), steady dividends, and free time. 

A quick comment about your asset allocation: 
1) Not bad, but remember your international investments are also subject to many other risks including political and exchange rate.
2) Switch out your International Market Fund and split between:  15% VEA and 15% VWO (developed and emerging markets, respectively).  This will also give you exposure to China and India.  Remember that American companies sell to these countries and targeted country investment is not necessarily needed.  Also, corruption and a lack of accounting transparency is prevalent in both China and India.
3) TIPS are currently costing you money to invest there.  Bonds are tricky these days, take a good look at HYS (Pimco's short-duration fund).  Also, the best course of action is buying bonds directly (and avoid Bond Funds).  You can usually buy individual bonds at $10K, and you have enough capital to buy several which will diversify your exposure (do not buy one 100K corporate bond, but ten 10K corporate bonds, from different companies of course).

Good luck!

[matchewed]

Next, regarding your 3-steps:
1)  Dollar cost-averaging is what you are planning here, and yes, it is a million times better than investing the total all at once. Especially in today's market, with everything reaching new highs--> most investors are expecting a correction (just have no idea when.... but if you read Mark's above, bubbles are always driven by cheap money).

Just saying it is better doesn't mean it is better. Lump sum is mathematically superior. But if your comfort level with it and how you emotionally react to your money makes you think you'll do something stupid on a market drop then maybe the better approach would be to look at your AA rather than lump sum vs. DCA. If an individual feels that their money is too risky then dial back to a more conservative AA rather than letting your money lose actual value to inflation during the 2+ years it will take to DCA that money. Much like lump sum has the risk that the market will drop and it will recover too. DCA has the risk that your cash will lose value to inflation. You don't get that loss back though. It's gone.

People have been screaming since 2011 about the next drop. And I'm sure the market will drop. But you're investing that money for a 30+ year time frame not a two year one. Better to change your perspective on where that money is going to be used rather than play the panic game.

[nereo]

It all sounds so simple, so naturally I have some doubt that I missed something. I will leave it to all of you much smarter people to poke some holes in my plan. 

No, I don't think you've missed anything.  Your plan differs from one I might have chosen, but everyone's AA *should* be different.

In the past couple of years as my savings balance has grown I've read hundreds if not thousands of articles with advice on how to invest your money. The only thing that accomplished was to paralyze me and led to zero action on my part. My money is still just sitting in a bank account earning .001%.

If there's one thing I'd like to stress to you, it's that saving for your retirement can be extraordinarily simple.  We are living in a golden-age for people who want to be in charge of their own money.  We have low-cost index funds and ETFs, and we can invest very small amounts automatically every week.  That simply wasn't an option 40 years ago, when you needed either a lot of money or a high-cost broker to buy individual stocks for you.  Congress created the IRA, ROTH-IRA and HSA - perhaps our best vehicles for retirement.  And of course forums like this one connect you to lots of people who will help you understand every facet of retirement planning.

In the end all the advice boils down to this:  1) Save as much as you can (more than you earn), as often as you can, preferably in low-cost index funds or other diversified investments that yield more than inflation over long time periods.  2) Utilize every tax-advantaged account you have access to (e.g. IRA, 401(k), etc).  3) Consider the race finished once you have 25x your projected annual spending amounts.
That's it.  Everything else is just noise, or variations on this basic theme.

My asset allocation will be as follows:
(....blah blah blah)

Great.  You've set up your AA!  Here's my recommendation.  Write those down in ink, and next to each one write 2-3 sentences about why you want to hold that in your portfolio.  For example: "VTSAX gives me the entire US stock market, giving me lots of diversification.  It's dominated by large fortune 500 companies, but I will be exposed to small caps too, some of which will die and some of which will grow."
Then stick to your AA.  You may consider altering your AA no more than once-per-year, and only after carefully re-reading your explanations for why you want to hold each component, and then considering why you want to change it.  The reason should never be "I'm chasing the hot market"

A few other comments from your post:
many "internatinoal funds" are already heavily weighted towards China and India (the #2 & #3 economies by GDP).  Since you are planning on having an international fund + an India/China fund, make sure you know what the former is invested in, or you may find that the majority of your international exposure is overwhelmingly in these two countries. 
Also - I'd recommend moving your cash first and then once that is invested convert 401(k) and IRAs to Vanguard.  I'll respectfully disagree with ADK_Junkie that Dollar-cost-averaging is "a million times better", but if it helps you sleep better at night it's not a bad decision.
50k/year is a high cost of ER living for people on this blog.  Even more than your savings rate, reducing how much you spend will have the largest impact on your future financial security.  Just sayin'.
Real-estate can offer some of the best rates of return out there, but you have to be a bit more involved and know your market.  Poke around in the Real-estate and Landlording forum if you are considering this.  PLenty of advice there

I hope this helps
N

[IloveFIRE]

Generally, I think you have a fairly solid plan.  Especially the access to saving/investing $110K annually (I seriously need a pay upgrade).

First, I'd like to recommend two books regarding investing:
1)  The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit by Aswath Damodaran (by far the best out there for serious investors, Prof. Damodaran of NYU is one of the most highly regarded valuation individuals)
2)  The Most Important Thing by Howard Marks (chief of Oaktree Capital).  This book is better for the lay-person, but it really spells out valuable insights to the market and how to generate favorable returns.

Thank you for the book recommendations. I will certainly add them to my reading list. 

Generally, I think you have a fairly solid plan.  Especially the access to saving/investing $110K annually (I seriously need a pay upgrade).

2)  Much has been written on this site about the safe-withdrawal-rate ("SWR") of 4% (as opposed to your 5% net assumption).  There are concerns by some that the market will not return historic levels given the current high valuations.  Now, this statement shouldn't change your course of action (saving and investing as much as you can possibly afford for the next five years).... I just think this withdrawal expectation is aggressive and may not enable you to weather a prolonged downturn.  Again, saving and investing (in equities) is your best bet, but I personally am shooting for a 3% to 4% SWR.
3)  Real Estate is tough, it's really a second job, while the cash flow can be extremely positive, there is a lot of risk, and a lot of headache.  Personally, my real estate play is with Vanguard's REIT Index Fund.  This gives me plenty of diversification (i.e., lower risk), steady dividends, and free time. 

Great point on the 3-4% SWR vs. my suggested rate of 5%. I'm not sure how I screwed this one up as I've seen the dozens if not hundreds of posts on this particular topic and seems that 3% SWR is the way to go from a more conservative approach. I will certainly adjust that!

I thought about investing some of my tax sheltered money (IRA/401K) in a REIT Fund but it seems some investors on these forums are generating some very impressive cash flow on their own. This is not possible where I live (SoCal) but certainly seems to be a possibility in other parts of the country. 

2) Switch out your International Market Fund and split between:  15% VEA and 15% VWO (developed and emerging markets, respectively).  This will also give you exposure to China and India.  Remember that American companies sell to these countries and targeted country investment is not necessarily needed.  Also, corruption and a lack of accounting transparency is prevalent in both China and India.

I agree with you here, the only reason I still want to invest in India/China even given the risks you point out is that these two countries have 2+ billion people that will eventually have 401K/IRA etc... I believe this demand will by far outsrip supply. I don't have any data to back this up, just my gut feeling.

3) TIPS are currently costing you money to invest there.  Bonds are tricky these days, take a good look at HYS (Pimco's short-duration fund).  Also, the best course of action is buying bonds directly (and avoid Bond Funds).  You can usually buy individual bonds at $10K, and you have enough capital to buy several which will diversify your exposure (do not buy one 100K corporate bond, but ten 10K corporate bonds, from different companies of course).

Wasn't aware that I can buy directly. Thanks for the tip. With interest rates set to rise in early next year I'm def looking at a short-duration fund. Will check out Pimpco.

Thanks for taking the time to review my plan! I really appreciate all the feedback.

[IloveFIRE]

Just saying it is better doesn't mean it is better. Lump sum is mathematically superior. But if your comfort level with it and how you emotionally react to your money makes you think you'll do something stupid on a market drop then maybe the better approach would be to look at your AA rather than lump sum vs. DCA. If an individual feels that their money is too risky then dial back to a more conservative AA rather than letting your money lose actual value to inflation during the 2+ years it will take to DCA that money. Much like lump sum has the risk that the market will drop and it will recover too. DCA has the risk that your cash will lose value to inflation. You don't get that loss back though. It's gone.

People have been screaming since 2011 about the next drop. And I'm sure the market will drop. But you're investing that money for a 30+ year time frame not a two year one. Better to change your perspective on where that money is going to be used rather than play the panic game.

From what I've read it seems that investing the entire lump sum is mathematically superior. However I am human and unfortunately emotion plays a key part in how I view the world. I'm sure that in 90%+ of cases it makes sense to invest the entire lump sum. I'm also convinced that the market will continue to go up, even if it does dive 20% tomorrow it will eventually reach a new high.

The emotional part is having to witness all my savings drop by 20% overnight and not "recover" for 2-3 years. That would be very unmotivating and I'm afraid it may make it that much more difficult to stay the course and save all my money and invest in the market vs. spending it on frivolous things...

In any case I appreciate your input. In the end it just depends on how committed you are to the FIRE lifestyle and how much of a loss can you stomach before you quesiton the whole thing.

[IloveFIRE]

Great.  You've set up your AA!  Here's my recommendation.  Write those down in ink, and next to each one write 2-3 sentences about why you want to hold that in your portfolio.  For example: "VTSAX gives me the entire US stock market, giving me lots of diversification.  It's dominated by large fortune 500 companies, but I will be exposed to small caps too, some of which will die and some of which will grow."
Then stick to your AA.  You may consider altering your AA no more than once-per-year, and only after carefully re-reading your explanations for why you want to hold each component, and then considering why you want to change it.  The reason should never be "I'm chasing the hot market"

That's a great point and have just finished creating my "Personal Investment Plan" a couple of days ago. I don't recall on which forum/site I read about it but it was very helpfull to create one as it forces you to think about your AA and why you want that specific AA, your goals, rebalancing, etc...

A few other comments from your post:
many "internatinoal funds" are already heavily weighted towards China and India (the #2 & #3 economies by GDP).  Since you are planning on having an international fund + an India/China fund, make sure you know what the former is invested in, or you may find that the majority of your international exposure is overwhelmingly in these two countries. 
Real-estate can offer some of the best rates of return out there, but you have to be a bit more involved and know your market.  Poke around in the Real-estate and Landlording forum if you are considering this.  PLenty of advice there

I did notice that some of the Inernational funds tend to be heavily skewed towards one country/region and you wouldn't really know this from the title of the fund unless you read the prospectus. I have been reading the RE/Landlording forums and that's precisely why I'm so keen on getting into this area. The info on this site is truly invaluable.

Thanks for your feedback!

[matchewed]

Just saying it is better doesn't mean it is better. Lump sum is mathematically superior. But if your comfort level with it and how you emotionally react to your money makes you think you'll do something stupid on a market drop then maybe the better approach would be to look at your AA rather than lump sum vs. DCA. If an individual feels that their money is too risky then dial back to a more conservative AA rather than letting your money lose actual value to inflation during the 2+ years it will take to DCA that money. Much like lump sum has the risk that the market will drop and it will recover too. DCA has the risk that your cash will lose value to inflation. You don't get that loss back though. It's gone.

People have been screaming since 2011 about the next drop. And I'm sure the market will drop. But you're investing that money for a 30+ year time frame not a two year one. Better to change your perspective on where that money is going to be used rather than play the panic game.

From what I've read it seems that investing the entire lump sum is mathematically superior. However I am human and unfortunately emotion plays a key part in how I view the world. I'm sure that in 90%+ of cases it makes sense to invest the entire lump sum. I'm also convinced that the market will continue to go up, even if it does dive 20% tomorrow it will eventually reach a new high.

The emotional part is having to witness all my savings drop by 20% overnight and not "recover" for 2-3 years. That would be very unmotivating and I'm afraid it may make it that much more difficult to stay the course and save all my money and invest in the market vs. spending it on frivolous things...

In any case I appreciate your input. In the end it just depends on how committed you are to the FIRE lifestyle and how much of a loss can you stomach before you quesiton the whole thing.

You will witness several of those kind of drops in your investment timeframe, what will you do in 15 years at the one after next, or the one after that? The emotional part won't vanish. So what makes it different?

[IloveFIRE]

You will witness several of those kind of drops in your investment timeframe, what will you do in 15 years at the one after next, or the one after that? The emotional part won't vanish. So what makes it different?

The difference (I hope) is that in 5,10,15 years whenever the next big drop occurs I will have some capital gains built up to cushion the blow. I don't think you can compare the emotions driving the initial investment into the market with how an investor will handle a big drop 15 years down the road. Hopefully in those 15 years you have built enough confidence into the market that you won't panic and sell you holdings, which we all know is the wrong thing to do yet millions of people do it nonetheless...

At the end of the day I think this becomes more of a personal decision. I agree with you that statistically speaking it may be better to go all in but each investor needs to know their risk tolerance and assess how they would respond to a significant market correction. I will be honest and admit that it would freak me out if all my hard earned savings dove 20% the week after I just invested in the market.

[foobar]

I wouldn't buy a china or india fund. I would either buy an international fund that included them or I would buy an emerging markets fund. India and China are good growth opportunities but so are Brazil, Mexico Russia,  South Africa and Taiwan.

I would also really think about if you can handle the risk of 95% stocks. Being 75% tends to be upper limit for people looking at needing money in 10 years. You can get away with high stock allocation now but in a couple of years you are really going to want to ramp up the bonds.

[soccerluvof4]

+1 ^

[WorkingToBeFIREd]

In the past couple of years as my savings balance has grown I've read hundreds if not thousands of articles with advice on how to invest your money. The only thing that accomplished was to paralyze me and led to zero action on my part. My money is still just sitting in a bank account earning .001%.

Until this week, I was in a similar situation....six figures of cash sitting in a money market account earning a whopping 0.45%.  We've been focused on savings as much of our take-home pay as possible  but never took the next step to get it really working for us...good for the bank, not so good for us and/or any FIRE plans.  I finally used July 4th as my "Independence Day" from bad decisions and rolled 83% of that money into Vanguard (17% in the money market savings for emergency funds).

1. My plan is to invest roughly 50K each quarter going forward in the above mentioned allocation. I just don't feel comfortable going all in with the 225K cash balance. I know JCollins is against this but I would be devastated if the market took a 10% dive the day after I went all in.

So, after rolling that cash to Vanguard, a slight dip resulted in a loss of about 1% or less of the original investment....queue thoughts of "crap, did I screw up", "I should have waited", "the market is going to crash", etc.  I realized I needed to HTFU and take the long view....I will lose 100% of the opportunity for upside if my money is parked in a money market.  My next step is to setup monthly direct deposits into Vanguard so I can DCA over time.

3. The 30K in savings per year that I won't invest in equities I plan on investing in Real Estate. Some of the forum members seem to be doing quite well in this area so it certainly has peeked my interest. Since I have zero experience in this area I'm not going to include this in my passive income just yet. I want to buy a few properties first and see how that goes before I count on this income.

I went with a REIT fund....I'm sure RE ownership can be rewarding, but I've got enough work at the moment.

For what's it worth (and your AA may be different based on FIRE timeline and other plans), here's where I landed:

• VTSAX Total Stock Index - 55%
• VTIAX International Stock Index - 20%
• VBTLX Total Bond Index - 15%
• VGSLX REIT Index - 10%

Best of luck!

[arebelspy]

You will witness several of those kind of drops in your investment timeframe, what will you do in 15 years at the one after next, or the one after that? The emotional part won't vanish. So what makes it different?

The difference (I hope) is that in 5,10,15 years whenever the next big drop occurs I will have some capital gains built up to cushion the blow.

But with the larger capital gains and bigger amount built up in that timeframe, the drop will be even more devastating in terms of dollar amounts (the same percentage drop will mean much more "lost" in dollars).  I.e. a 20% drop of 50k is only 10k.  A 20% drop of 1MM is 200k.  If you'll struggle with your portfolio dipping by 10k now, how will you handle it dropping by hundreds of thousands?

You may need to reflect on this some more, as it's the biggest issue I'm seeing in your plan, and it's the biggest issue most investors face - psychology.  The fact that your money was sitting on the sidelines for a long time reinforces that. 

Good luck!  :)

[frugalnacho]

The difference (I hope) is that in 5,10,15 years whenever the next big drop occurs I will have some capital gains built up to cushion the blow.

Cushion what blow?  As I understand you are still in the accumulation phase and will be until at least 2019.  That means all the money you are investing is money you don't need right now and you are ear marking it as capital for your retirement.  So other than some numbers on a computer screen I don't understand what "blow" you are referring to (other than the psychological blow of losing 10% of your investments).

As arebelspy pointed out that "blow" is going to be larger and larger the more you accumulate and have in your account.   It's a double edged sword though because the more you have the more you gain during an increase, and in the long run you are far more likely to benefit from that edge of the sword than you will be hurt by a drop.

[livingthedream]

I like the recommended portfolios from Marketwatch columnist Paul Merriman here - http://paulmerriman.com/pauls-mutual-fund-recommendations/ Consider the differences in tax deferred vs. taxed. I moved bonds from TIPS to Vanguard CA Intermediate-Term Tax-Exempt in my taxable account because I pay a lot of taxes in Califonia. REITs are good in taxed differed but not efficient in a taxed account from what I read. Like some others have mentioned I wouldn't put all my emerging market funds in two markets.

A couple of other good resources on thinking about allocations and portfolios:
http://assetbuilder.com/couch_potato/couch_potato_cookbook
http://www.marketwatch.com/lazyportfolio

[IloveFIRE]

Thank you everyone for your help and advice. In the end I decided to go 80% in the market with the remaining 20% to be invested within the next 6 months. This is not just for market timing it's also due to a potential real estate investment opportunity that may require some cash so decided to wait for a couple of months and see if the deal will go through. I went with the following asset allocation:

VTSAX Total Stock Index - 60% (actually the 401K money I invested in a S&P500 fund as my 401K does not offer VTSAX)
VEA Developed Markets ETF - 15%
VWO Emerging Markets ETF - 15%
The remaining 10% I will use as play money and invest in individual stocks, sectors, etc... I know odds are against me beating the market but I'd like to try anyway.

Now to work on the 50K/year expenses. I now I can do much better than that even in a high COLA place like SoCal.

[defenestrate]

If you are still young, I would also look into funds that focus on small cap value--

VISVX
VFSVX
VTRIX

There is a lot of research that supports outperformance in either value or small cap investment over long periods of time--these are highly diversified low cost ways to gain that exposure

[jb_in_DC]

ILoveFIRE, your asset allocation looks pretty similar to the one I settled on after years of mostly just keeping my 401(k) contributions on auto-pilot into a broad-based index fund.  My only suggestions are that you may want to also consider a Vanguard bond fund, and I will second the recommendation to also consider Vanguard's REIT index fund as a good inflation hedge and a way to diversify into real estate.

[prof61820]

1. My plan is to invest roughly 50K each quarter going forward in the above mentioned allocation. I just don't feel comfortable going all in with the 225K cash balance. I know JCollins is against this but I would be devastated if the market took a 10% dive the day after I went all in. 

Given how cautious you are, this is the way to go.  You may miss out on some gains by getting in the market in this manner but if the market tanks, your next purchase will be at a discount and you won't panic and sell your initial investment for a loss.

[aclarridge]

You will witness several of those kind of drops in your investment timeframe, what will you do in 15 years at the one after next, or the one after that? The emotional part won't vanish. So what makes it different?

The difference (I hope) is that in 5,10,15 years whenever the next big drop occurs I will have some capital gains built up to cushion the blow. I don't think you can compare the emotions driving the initial investment into the market with how an investor will handle a big drop 15 years down the road. Hopefully in those 15 years you have built enough confidence into the market that you won't panic and sell you holdings, which we all know is the wrong thing to do yet millions of people do it nonetheless...

At the end of the day I think this becomes more of a personal decision. I agree with you that statistically speaking it may be better to go all in but each investor needs to know their risk tolerance and assess how they would respond to a significant market correction. I will be honest and admit that it would freak me out if all my hard earned savings dove 20% the week after I just invested in the market.

You guys were mentioning that going all-in right away is "mathematically superior" - I think by that you mean highest expected return. However, highest risk adjusted return (often measured by sharpe ratio) is likely dollar cost averaging. Given you only live once, have a finite lifespan, etc. it's prudent to look at risk adjusted returns, and in my mind, all emotion aside, in your situation it's "mathematically superior" to dollar cost average in.

[GlassStash]

You will witness several of those kind of drops in your investment timeframe, what will you do in 15 years at the one after next, or the one after that? The emotional part won't vanish. So what makes it different?

The difference (I hope) is that in 5,10,15 years whenever the next big drop occurs I will have some capital gains built up to cushion the blow. I don't think you can compare the emotions driving the initial investment into the market with how an investor will handle a big drop 15 years down the road. Hopefully in those 15 years you have built enough confidence into the market that you won't panic and sell you holdings, which we all know is the wrong thing to do yet millions of people do it nonetheless...

At the end of the day I think this becomes more of a personal decision. I agree with you that statistically speaking it may be better to go all in but each investor needs to know their risk tolerance and assess how they would respond to a significant market correction. I will be honest and admit that it would freak me out if all my hard earned savings dove 20% the week after I just invested in the market.

You guys were mentioning that going all-in right away is "mathematically superior" - I think by that you mean highest expected return. However, highest risk adjusted return (often measured by sharpe ratio) is likely dollar cost averaging. Given you only live once, have a finite lifespan, etc. it's prudent to look at risk adjusted returns, and in my mind, all emotion aside, in your situation it's "mathematically superior" to dollar cost average in.

I think you make a compelling point. The following excerpt from an article elaborates on the probabilities.

"Both lump-sum investing and DCA have their appropriate time and place. The research shows that lump-sum investing pays off about 66% of the time, which is a long way from all the time. It certainly makes sense to look carefully at the current market conditions. If you hit that bad 33% in lumpy style, you can lose a lot of money.

On the other hand, many DCA users fail to monitor their investments after they start. The mere fact that you are investing in small pieces does not mean that you don't need to rebalance your portfolio, watch for changes in fund managers or in the economic environment, etc. So part of the problem is not DCA itself, but the fact that other investment issues still have to be taken care of."

http://www.investopedia.com/articles/stocks/07/dca-fight.asp#axzz1UGjyAHAt

Mathematically superior as lump sum may be, there is still a risk that your particular situation would have yielded better results with DCA (which is why some people recommend DCA). Being better 66% of the time is certainly a lower % than I imagined when I heard people championing lump sum.
 

[arebelspy]

Mathematically superior as lump sum may be, there is still a risk that your particular situation would have yielded better results with DCA (which is why some people recommend DCA). Being better 66% of the time is certainly a lower % than I imagined when I heard people championing lump sum.

I donno, twice as often seems like pretty good odds to me.  If we're rolling dice and you can choose to win if a 1 or 2 is rolled or can choose to win if a 3, 4, 5, or 6, I know which one I'm picking...

[aclarridge]

Mathematically superior as lump sum may be, there is still a risk that your particular situation would have yielded better results with DCA (which is why some people recommend DCA). Being better 66% of the time is certainly a lower % than I imagined when I heard people championing lump sum.

I donno, twice as often seems like pretty good odds to me.  If we're rolling dice and you can choose to win if a 1 or 2 is rolled or can choose to win if a 3, 4, 5, or 6, I know which one I'm picking...

In your example, how big is the win vs. how bad is the loss, is an important part you're leaving out.
For example, let's say there's a game where you bet your entire stash once you hit FI, to either have 0 with probability 1/3 or 10x as much with probability 2/3. Mathematically an amazing expected return, but not a bet I would make, because the risk is too high. You have to account for risk.

[mxt0133]

In your example, how big is the win vs. how bad is the loss, is an important part you're leaving out.
For example, let's say there's a game where you bet your entire stash once you hit FI, to either have 0 with probability 1/3 or 10x as much with probability 2/3. Mathematically an amazing expected return, but not a bet I would make, because the risk is too high. You have to account for risk.

To keep things in context, the OP is expecting 8% returns so by his own expectations then DCA is inferior to lump sum.  If that is not the case then he should re-evaluate his assumptions and base his decisions on that. Are his assumptions realistic, based on historic returns yes, the are more so than going to 0.

[aclarridge]

In your example, how big is the win vs. how bad is the loss, is an important part you're leaving out.
For example, let's say there's a game where you bet your entire stash once you hit FI, to either have 0 with probability 1/3 or 10x as much with probability 2/3. Mathematically an amazing expected return, but not a bet I would make, because the risk is too high. You have to account for risk.

To keep things in context, the OP is expecting 8% returns so by his own expectations then DCA is inferior to lump sum.  If that is not the case then he should re-evaluate his assumptions and base his decisions on that. Are his assumptions realistic, based on historic returns yes, the are more so than going to 0.

My example was not intended to be directly analogous to OP's issue...see my first post in this thread which discusses what you're talking about.

[arebelspy]

My example was not intended to be directly analogous to OP's issue...

But that's exactly what we're talking about.

My point was that if Lump Sum is mathematically superior most of the time, I'll take that, and be content knowing I made the right decision, even if the outcome didn't turn out favorably.

Just like in the dice scenario, if I chose the 3-6, and a 1 or 2 was rolled, I'll be okay with that.

Others would take the 1 or 2 gamble, and come out behind the vast majority of the time, but feel better psychologically or having avoided the risk of the big drop.  That's fine, just not for me.

(The EV of a big drop is already calculated in the numbers for how often DCA "wins".)