Author Topic: Windfall into existing portfolio  (Read 2849 times)

Norwegian72

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Windfall into existing portfolio
« on: March 01, 2015, 02:34:10 AM »
Just a quick question, I've received a modest windfall, about 1/3 of my current index fund portfolio. I've decided to just lump it into the portfolio while retaining the balance.

Would you place just one order for each fund come Monday morning?
Would you space it out over the course of a week, essentally placing an order for each fund each day?
Longer timespan?

Current portfolio totals about 45K USD
Windfall is about 17K USD

(1USD is a whopping 7.67NOK at time of writing)

Regards

bluecheeze

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Re: Windfall into existing portfolio
« Reply #1 on: March 01, 2015, 03:20:40 AM »
Different schools of thought on this.  I prefer to just throw it all in at once instead of trying to catch the market swings. 

Norwegian72

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Re: Windfall into existing portfolio
« Reply #2 on: March 01, 2015, 03:25:11 AM »
Different schools of thought on this.  I prefer to just throw it all in at once instead of trying to catch the market swings.

Thank you for your response. I was just thinking about reducing risk by short term averaging and if there is any merit to this.

Regards

josstache

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Re: Windfall into existing portfolio
« Reply #3 on: March 01, 2015, 03:26:12 AM »
Let's say the market moves in random negative or positive amounts from day to day.  Let's also say there's a 51% chance the market will go up, and a 49% chance the market will go down.  If we agree that this is a crude, but more correct than not, description of the market, then there is generally no reason not to invest any windfall as soon as you get it, because the expected value of being in the market is positive.  Indeed, that's why we're investing in the first place. 

"Dollar cost averaging" is a form of insurance against stocks going down the day after you invest.  The cost of such insurance is the expected value of being totally invested during the period over which you spread out your dollar cost averaging.  Ignoring tax law issues, I suspect the only economically rational reasons to buy insurance are (A) to protect against catastrophic losses, or to (B) bilk the insurer when you have information the insurer does not have or cannot otherwise incorporate into the price of the insurance.

Stocks going down the day after you invest could possibly be catastrophic for some people, but it sounds like that does not apply to you.  Therefore (A) can be eliminated as a reason to dollar cost average in your case.

(B) is somewhat incoherent in the context of dollar cost averaging, but would only apply if you somehow knew that stocks were more likely to go down than up over the relevant period. But if you knew that, then the most rational choice is to invest via lump sum after the end of such period.  As such, (B) is completely inapplicable as a justification for dollar cost averaging.
« Last Edit: March 01, 2015, 08:37:28 AM by josstache »

Norwegian72

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Re: Windfall into existing portfolio
« Reply #4 on: March 01, 2015, 03:38:15 AM »
Let's say the market moves in random negative or positive amounts from day to day.  Let's also say there's a 51% chance the market will go up, and a 49% chance the market will go down.  If we agree that this is a crude, but more correct than not, description of the market, then there is generally no reason not to invest any windfall as soon as you get it, because the expected value of being in the market is positive.  Indeed, that's why we're investing in the first place. 

"Dollar cost averaging" is a form of insurance against stocks going down the day after you invest.  The cost of such insurance is the expected value of being totally invested during the period over which you spread out your dollar cost averaging.  Ignoring tax law issues, I suspect the only economically rational reasons to buy insurance are (A) to protect against catastrophic losses, or to (B) bilk the insurer when you have information the insurer does not have or cannot otherwise incorporate into the price of the insurance.

Stocks going down the day after you invest could possibly be catastrophic for some people, but it sounds like that does not apply to you.  Therefore (A) can be eliminated as a reason to dollar cost average in your case.

(B) is somewhat incoherent in the context of dollar cost averaging, but would only apply if you somehow knew that stocks were more likely to go down than up over the relevant period, but if you knew that, then the most rational choice is to invest via lump sum after the end of such period.  As such, (B) is completely inapplicable as a justification for dollar cost averaging.

Thank you for this, I really appreciate it. I'm leaning towards using the lump sum approach as a catastrophic loss will only affect the graphs and maybe some self-esteem.

 

Wow, a phone plan for fifteen bucks!