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Subject:  Re: Roth Contribution techniques Date:  1/22/2003  10:46 PM
Author:  Mark0Young Number:  35606 of 76392

For those of you that have a Roth, do you put all your money into the given investment(s) in one lump sum at a certain time?

Yes. I have several reasons:

1. The general tendency of the market is upward. It might not look that way if looking at the past 3 years, but if one looks at the long range, say, a century, it is that way. So there is a better chance of higher returns by putting as much money in the stock market as soon as one can. (This is born out by studies on DCAing monthly over a 6-month period vs. lump sum investing: lump sum has something like a 66% chance of doing better, with peak returns better, but also peak losses greater. Sorry, I don't recall the specifics of the study any better.)

2. The tracking of contributions and making sure one is within the limits is easier if it is just one payment.

3. Even if one is investing in non-equities, it is still better to shelter as much of the growth (or dividends) as possible.

4. One is still DCAing, even when making full contributions on January 1, because one is making substantially equal-sized investments uniformly spaced apart, but in this case it is $3000/yr instead of $250/mo.

Now there are good reasons for DCAing:

1. If one doesn't have the full contribution, it is better to contribute what one can when one can, rather than wait until the end of the year. If means setting up an automatic plan to contribute $250/mo, that is still normally better than just saving up until December to make one contribution then. Note: this advice may have to be modified if one has transaction costs, e.g., it might make sense to do it quarterly instead of monthly if there are trading fees.

2. If the investment is particularly volatile, it may be better to DCA, which would buy more shares when prices are down and fewer when prices are up, so if the investment is quite volatile, DCA could reduce your average share price.

3. If one isn't used to market volatility, DCA would provide opportunity to get acclimated to one's investments going down and up, starting with a small amount invested, and as the amount builds up from additional contributions, one is also getting used to market movements.

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