The discussion regarding DCA and lump-sum investing is not academic for me. I’m retiring at the end of this calendar year. I will receive several million dollars in a lump sum from the sale of my company’s stock (privately held, employee-owned company). While I have the good fortune to be receiving this sizable amount, it will form the majority of my retirement savings. I will be investing it in a more or less standard asset allocation portolio using index ETF’s spread among large and small cap domestic and foreign stock, short-term bonds, TIPS, and REIT (I don’t want to get into percentages in this posting because that’s not the focus of my question). I’ll be using a withdrawal rate of about 3% or less.Thus, I don’t need a lot of growth to keep up, but protecting the downside does become important, especially with this “once in a lifetime” investing event. I get it that DCA generally isn’t a good idea because I could average this into the market over, e.g., a year, and then the market tanks at a year and a day. However, one article I read which was generally anti-DCA for all the reasons you guys have discussed here, nonetheless suggested that historically a DCA over a 6-month period has about a 7% protection against downside with a 1% loss of upside. http://www.bankrate.com/finance/investing/the-best-way-to-in... (page 2 of article.)The article went on to say that any longer than six months wasn’t a good idea, because the loss on the money you are not investing begins to outweigh the downside protection.What do you guys think?Thanks,Case
I don't think much can be added to the previous thread. The stock market is going straight up for 3 months now. Everyday you can find talking heads on CNBC who say the market is now fully valued and a correction is coming. (Others say the recovery is doing OK and stocks are likely to do well at least until after the election.)If the market does do a major correction right after you invest, you will regret not having done DCA, ie held some back to take advantage of the lower prices. On the other hand, the yield you are likely to get on the cash you hold is likely to be low. (Some like the better yield of junk bonds, but others say inflation is already here--interest rates have to rise one of these days--as in after the election.)Of course if the market continues to recover, you will lose out on those gains and not be able to make them up with interest on your fixed incomes.There's no two ways about it. Its a risk. You cannot completely protect yourself from it. And in a year or two, you will know what you should have done.Personally, I would split the funds into chunks and invest at 3 mo intervals. But you might accelerate the pace if you see good opportunities or become convinced one way or the other as time goes on.
I'd say 2 things.First, read this paper Enhanced Dollar Cost Averaging http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2008465The first section neatly discusses the problems with DCA, but summarises "Thus, dollar-cost-averaging may be inferior to the optimal strategy, but is superior to the strategy most investors are likely to adopt as a result of their human nature."With a several $M lump sum, I'd say that you have no worries either way. Even suboptimally getting in, you'll still have a potload of money. Heck, with a 2M+ lump sum, I'd be inclined to put 500K into bonds & preferred stocks for the income, and invest the rest.2nd,FWIW...when I retired I moved 500K of my 401k to be managed by Fisher Investments. They invest mainly in stocks, with very little going into ETFs. They had it all invested in only a couple of weeks. No DCA'ing at all.
Case,Great question! the reality is - anyone who has the option of DCA, IMHO should not!If some one is putting away so much a paycheck, great! But that is not dollar cost averaging. Putting a lump some in based on some preset time criteria is timing the market - AND USING BAD INDICATORS. It is not even an argument about whether timing the market is bad. The argument is timing the market based on pulling a time out of the hat is BAD.Just thought I would reference the first page of that very article you cite. However, "this decision [DCA] is not supported by any rational decision making (model)," Constantinides says. In fact, the research shows that most of the time you'll end up with more money if you invest a lump sum all at once.Consider the work done by Gregory Singer, director of research, and Ted Mann, analyst, both with Bernstein Global Wealth Management. They calculated the results of investing in the Standard & Poor's 500 using both lump sum investing, as well as dollar-cost averaging, for all the rolling 12-month periods between 1926 and November 2008.The average yearly return for the "lump sum" approach, or investing everything at the beginning of the year, was 12 percent. That compares with 8 percent under dollar-cost averaging.Of all the Pro DCA studies I have read, typically the numbers can never be verified or there's a glaring flaw in the statistics. Mostly - just clearly using the data that supports the position and not the whole data set. Scanning and then picking a DCA time investment schedule on the best days of the years and then comparing to the worst day of the year to put in a lump sum. Or Just putting in the money and then the next day is the crash, never, to your concern, what if just after puting in the DCA money, it crashes.Your best bet is working on the allocation and deciding, if it is at a price you will pay get in (more for individual stocks than ETFs but still have some relevance as you mention short term bonds which is the percentage discuss we won't start here)For some cases, suggest:Decide on the allocation, then decide how you can hedge that allocation for the short term downside protection. Specifically in the areas that concern you.Put option on SPY, or other ETFs (or call option on the inverse)Then overtime, slowly decrease the hedge amount.
Second reading the paper posted by Ray!!
2nd,FWIW...when I retired I moved 500K of my 401k to be managed by Fisher Investments. They invest mainly in stocks, with very little going into ETFs. They had it all invested in only a couple of weeks. No DCA'ing at all.i guess what i did with 401k -- over about 9 months, i split it among SPY and four Vanguard funds (was not trying to time the market ..was trying to decide what i wanted)then moved the money in the funds into ETFs, then some of that into CDs, then that into dividend stocksnot recommending, just mentioning another way to do things
FWIW...when I retired I moved 500K of my 401k to be managed by Fisher Investments. They invest mainly in stocks, with very little going into ETFs. They had it all invested in only a couple of weeks. No DCA'ing at all.What had your 401(k) been invested in prior to you moving it to Fisher? If the was mostly in stocks, all you were doing was changing the stocks that you were investing in, not 'putting a lump sum into the market' - the lump sum was already in the market.AJ
Hi Case58 --This is a personal perspective here, but let's start with a question, rather than an opinion: What is your goal?With "several million", you can live comfortably, even in higher cost parts of the country, without needing to rely on esoteric optimization strategies.If you begin with your goal and build a strategy that would invest enough to meet your goal plus a comfortable margin, even within the constraints of today's market conditions, then what you'll likely find is that you'll still have cash left over. That additional cash can either be an additional buffer to help you sleep at night, additional money to put at risk in the hope of better returns or income, the 'splurge' on yourself and your family as a reward for a successful career and decades of hard work, or some combination or each.Ultimately, it's your choice, and you need to balance the financial concerns with the personal ones and decide on a solution that fits your personality and goals. No amount of wrangling over the edges of "should I invest now" or "should I wait until next month" or "should I ease in over time" is going to help if you're not comfortable with the fundamentals of your chosen strategy and how it helps you meet your goals.What you may want to do is take a free trial of the Fool's "Rule Your Retirement" newsletter, which can be found on a link on this page: http://www.fool.com/shop/newsletters/index.aspx . What you'll find there is a wealth of information on how to manage the transition from paychecks to living off your investments.Regards,-ChuckInside Value Home Fool
What had your 401(k) been invested in prior to you moving it to Fisher? If the was mostly in stocks, all you were doing was changing the stocks that you were investing in, not 'putting a lump sum into the market' - the lump sum was already in the market.When Fisher got it, it was 100% cash. So to them it was indeed a lump sum.They neither knew, nor cared, nor asked, how it had been invested before. My directions to Fisher were: "Invest this for gains, not income. Aside from that, I'm paying you to invest it your way, so do as you will, without consulting me." (They had offered to run their picks past me and let me say yea/nay for each one.)Although, IIRC, it was mostly in an S&P index fund, and about 10% in my company stock.
Although, IIRC, it was mostly in an S&P index fund, and about 10% in my company stock.Since it was mostly invested in the stock market anyway, I would again say that all you did was rebalance your investments - doesn't matter who actually made the decision on what to buy. The fact that you took the money out of the market for a couple of weeks to do your rebalancing was probably pretty irrelevant, assuming that the market didn't have any big moves in that 2 week period. Every time I have moved accounts, such as from a 401(k) to an IRA; or from one brokerage to another; there has been some time lag from when their money leaves one account until it gets reinvested in the new account. Seems like this is what occurred in your case, too.AJ
Thank you all for your advice, and, Ray, for that interesting link on EDCA. Lots to think about.Case
..First, read this paper Enhanced Dollar Cost Averaging http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2008465The first section neatly discusses the problems with DCA, but summarises "Thus, dollar-cost-averaging may be inferior to the optimal strategy, but is superior to the strategy most investors are likely to adopt as a result of their human nature." I've also heard good things about value averaging. The Wikipedia entry for this dosn't say a lot but it has some interesting links at the bottom of the page that would be worth looking into. http://en.wikipedia.org/wiki/Value_averagingIt probably goes without saying but while you are deciding what to do you should be sure that the money is split up between multiple accounts and institutions so that you do not exceed the FDIC( or similar ) account insurance limits. Greg