No. of Recommendations: 11
would you recommend invest that sum over the next two years or so at a fixed amount on a fixed day? Or do you think it would be best to invest it all right now, regardless of how highly valued the markets are currently?

The benefit of averaging in a lump sum is to minimize the possibility of regret. So the question you have to ask yourself is "Do I prefer to be rich or emotionally comfortable?"

Here's a couple of quotes I have in my quotes file on the subject:

"Dollar averaging in a lump sum -- DCA :
any approach other than moving straight to your optimal allocation is financially suboptimal. However, some plans are less sub-optimal than others. For example, averaging-in over one year has quite a low expected cost. More efficient still would be to immediately move about 50% of the way to optimal (thereby getting 75% of the benefit) and then moving the rest of the way over the course of a year."

Look at it from another perspective. You average in over a 1 year period because you fear that the market will drop right after you invest. Right?
Okay, how long will you be invested? A 55 year old is looking at another 30+ years of life.
So you'll be fully invested for 29 years. So for 97% (29/30) of your remaining lifetime you will be 100% invested. What have you gained by deferring that for 3% (1/30) of your lifetime?

One way you are fully invested for all your life, the other way you are fully invested for almost all of your life.

Average in over a year. At the end of the year you are all in. If you were scared of the market dropping the first year, why aren't you equally scared of a market drop in the 2nd year? Makes no sense. There is nothing special about year #1 vs. year's 2 thru 30+.

Another from my quotes file:
"Waiting for a correction:
under the assumption that the market follows a random walk, as long as you believe the expected return of the market is higher than what you’d earn on your cash, the expected opportunity cost of waiting for a correction exceeds the expected benefit of investing after the correction.... ... confuse the chance of a correction from peak-to-trough with the lower chance of a correction from a fixed price level...
Putting these together, the mean expected cost of waiting for a correction was about 8% versus investing right away.

We note that while the probability of a correction inside the horizon is somewhat likely, it’s far from certain – and that when it doesn’t happen, the expected opportunity cost is much higher than the expected benefit."

My own inclination is always to spread around the dollar-coast averaging.
Think it all the way through.
Keep in mind that your money can switch from 100% cash to 100% stocks with a click of the mouse. You can literally go from 100% stocks to 100% cash and back to 100% stocks in 2 seconds. ramp up from 0% stocks to 100% stocks in 12 months. What's different about month 12 month than month 1? If you wanted to ramp up from 0% to 100% THEN, why are you okay with staying at 100% NOW? Following that logic, you should now immediately go to 100% cash and then ramp up again. The effort to drop back to 0% is just one mouse click, it is virtually zero cost & effort, so there's no reason you can't do it.

I have to admit, once I thought about this averaging in thing --some 20-25 years ago-- I couldn't see the logic. And I still can't see the logic, so I have a hard time explaining why is seems like a useless and senseless thing to do. It's like if somebody came up to me and said they had an inclination to smash their hand with a hammer. That's such an obviously bad thing to do that you'd have a hard time explaining to them why it's a bad idea.
Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.