Author Topic: Nervous about investing a large lump sum  (Read 6281 times)

cbgg

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Nervous about investing a large lump sum
« on: January 30, 2014, 09:56:09 PM »
Let's say that you had $150k of cash sitting around and you wanted to get it invested in index funds.  Would you divide it into pieces and invest it over time (say 1/4 of it every 3 months) or would you just plunge in and do it all at once?

Heart of Tin

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Re: Nervous about investing a large lump sum
« Reply #1 on: January 30, 2014, 10:07:31 PM »
Personally? I would take the plunge all at once, but that's just a personal preference. If your time horizon is very long, it probably doesn't matter very much unless the market moves massively this year. If your time horizon is relatively short, then dollar cost averaging over a pre-specified time period is perfectly prudent. Like most things this comes down to a question of personal risk tolerance. Do whatever lets you sleep at night.

Cheddar Stacker

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Re: Nervous about investing a large lump sum
« Reply #2 on: January 30, 2014, 11:24:38 PM »
If you're worried about dollar cost averaging, which is essentially what you explained, many on this forum have posted theories that "waiting" to invest a lump sum in order to dollar cost average is a losing proposition. You should go all in, but read the next point please.

If you're worried about volatility, diversify with bonds, real estate, and cash/treasuries. See the JL Collins stock series. It's a multi-part series that, among other very important things, explains the reasons why diversification is important. Here's a link to part 4 where he gets into the diversification he recommends.
http://jlcollinsnh.com/2012/05/09/stocks-part-v-keeping-it-simple-considerations-and-tools/

I'd go all in right now, but diversify.

Mazzinator

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Re: Nervous about investing a large lump sum
« Reply #3 on: January 31, 2014, 01:17:22 AM »
This also would be a good read. In the study, lump sum investing led to higher porfolio values approx 2/3 of the time, regarless of AA.


https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf

Honest Abe

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Re: Nervous about investing a large lump sum
« Reply #4 on: January 31, 2014, 03:22:26 AM »
Everyone here is correct in saying that lump sum is statistically better over multiple samples.

Having said that, I'd probably DCA for my own peace of mind if I were in that situation.

nicknageli

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Re: Nervous about investing a large lump sum
« Reply #5 on: January 31, 2014, 09:24:21 AM »
I recently made three fairly large index fund purchases.  Two were made when the Dow was at about 16,400 (just for reference) and one was at about 15,700.  It's been a little hard watching the shares tank, but I know that statistically it should do a lot better than the 0.3% interest it was earning in a money market over the next 20+ years.

Vanguard VDADX was the fund.  I welcome any opinions on pros and cons of this fund if anyone is inclined.

soccerluvof4

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Re: Nervous about investing a large lump sum
« Reply #6 on: January 31, 2014, 11:00:39 AM »
I put 150k in just yesterday VTSAX , VGSLX , VBTLX and VTIAX...40%/30/%15%/15%. Will put in next allocation on drop and adjust accordingly within next 30days. If not a drop i will still adjust fund and make my allocation. Put it in and forget about it. Look at it once or month or major corrections.

Frankies Girl

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Re: Nervous about investing a large lump sum
« Reply #7 on: January 31, 2014, 11:13:06 AM »
Let's say that you had $150k of cash sitting around and you wanted to get it invested in index funds.  Would you divide it into pieces and invest it over time (say 1/4 of it every 3 months) or would you just plunge in and do it all at once?

I did have that amount, and I dropped it all in on the same day.

If you're really nervous, then do the dollar cost averaging you're talking about (dividing it up and investing regularly over time) but one thing to really ask yourself is why you'd be nervous. You're still going to be in the market with the same amount invested in the end. It will go down and up and all over the place if you look at it short term.

So if you're nervous about the market/investing itself, might need to do some more reading and thinking about your comfort/risk levels and investments in general.


aclarridge

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Re: Nervous about investing a large lump sum
« Reply #8 on: January 31, 2014, 11:39:32 AM »
There was a good thread about this a while ago and what I remember is that for highest expected return (mean of possible outcomes using historical data), lump sum investing has been the way to go.

However, for lowest standard deviation of returns, dollar cost averaging over year 1 (roughly, can't remember) has been the way to go.

So which is better - riskier but with higher expected return, or safer but with not as high expected return?

I compared the Sharpe ratio for some example data in that post I'm too lazy to find, and found that dollar cost averaging wins using that metric.

I will note that both strategies are fine and have been statistically far superior to sitting on cash deciding which one to go with.

cbgg

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Re: Nervous about investing a large lump sum
« Reply #9 on: February 01, 2014, 11:42:34 AM »
Thanks for all the replies.

Ultimately, I agree that since I have a long time horizon there is really no point in dollar cost averaging over the course of a year. 

And certainly diversification is an important part of putting together my portfolio.

foobar

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Re: Nervous about investing a large lump sum
« Reply #10 on: February 01, 2014, 10:52:59 PM »
That is to be expected as any asset on average out performs cash in 2 out of 3 years. The DCA reduces your variance a bit (see the sharpe ratios at the end). Given you only get to do one trial run, you have to decide if it is worth it to give up some potential return for lower risk.

If your nervous, DCA across the various assets you like to hold and get on with your life. Sitting on the sideline doesn't make it easier. Sure it would be assume to think your going to swoop in on March 13 2009 to buy but the reality is you are much more likely to be sitting there on may 13th 2009 going the market is up 30%, can I buy in or is this a suckers rally?


This also would be a good read. In the study, lump sum investing led to higher porfolio values approx 2/3 of the time, regarless of AA.


https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf

Leisured

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Re: Nervous about investing a large lump sum
« Reply #11 on: February 02, 2014, 03:18:53 AM »
I concur with the other posters in recommending that you invest the money all at once in a diversified portfolio. You say you have a long time horizon, but that is all I know about you. If you are working, are optimistic about your job security, and are optimistic about your health, and do not need an income from the investment, I suggest borrowing say $30K to $50K and invest more. If you borrow $50K you will have a total investment of $200K, the loan secured by the investment. The interest is tax deductible.

I stress again that I know almost nothing about your situation in life, so this is merely a suggestion, not advice. If you have a long time horizon, the value of the loan stays fixed, but the value of the investment will rise over time, as will the dividends. You will pay off the debt over time as you would with a house mortgage.


OzzieandHarriet

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Re: Nervous about investing a large lump sum
« Reply #12 on: February 02, 2014, 10:04:19 AM »
We are going to be in this situation soon (if all goes well with a real estate sale). Vanguard recommended this allocation of index funds for a moderate risk portfolio -- 50/50 stocks/bonds:

VTSMX (stocks) 35%
VGTSX (international stocks) 15%
VBMFX (bonds) 40%
VTIBX (international bonds) 10%

c12mintz

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Re: Nervous about investing a large lump sum
« Reply #13 on: February 02, 2014, 10:32:58 AM »
cbgg,

Great question. I've had several family and friends ask me a similar question, but with less funds (usually talking $10-$50k).

The forum posts so far have been statistically accurate (lump-sum dominates DCA slowdown on average), but keep in mind the studies do not account for market P/E. We are currently near a peak in P/E multiples for the US common stocks.

But anyways, there are a LOT of important questions nobody has asked you:

1) What is your age? Or more importantly, how long do you want to keep this money invested?

2) Are you planning on drawing down immediately on this money, or will it remain fully invested for many years?

3) Related to #2, are you fully financially free of this money, is it just 'extra,' or do you need it for anything in the foreseeable future?

4) What is your risk tolerance? In other words do market fluctuations bother you, or does it not matter as long as you are up in the end? This might sound similar to #2 or #3, but there are many people who just can't stomach watching prices go down regardless of their overall wealth.


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If you aren't drawing down anytime soon and this money is for the long-term (5-10+ years), then imo the advice to diversify into bonds is HORRIBLE. If you are 60-70 and/or trying a 4-5% drawdown type approach, then it's not so bad.

The reason being is bonds are priced based on interest rates and perceived safety (ratings). Interest rates are near all-time lows which means the corresponding bonds, especially long-term, are near all-time highs. If inflation hits us, or if the i/r spikes back up, bond values will come crashing down. Contrary to common belief, it's actually possible to lose 20-30% in a bond fund.

Diversifying your investments doesn't necessarily mean you need/want treasuries or other bonds. Diversifying can include international indexes, emerging markets, growth stocks, value stocks, real estate holdings (REITs), infrastructure MLPs, commodity stocks, etc. Diversifying is GOOD, poor (or "one size fits all") asset allocation is BAD.