Over how much time should I dollar-cost-average my bonus from cash into mutual funds?

Question

I just cleared about $65k from my bonus. I don't want this sitting in cash, but at the same time prefer to move into stocks/bonds over time (e.g. I don't want to invest all $65k at one price, and risk doing it when the market is at a short-term high. I'd rather spread the risk out over time - i.e. typical reasons for dollar cost averaging). I already invest $120/day in an S&P 500 fund, and $150/week in an emerging markets fund (this is factored out of my normal take home pay). If it's relevant, I have a net worth of about $725k so the bonus amount is considerable.

How long is reasonable to spread out the investment of the $65k bonus? And is there any intermediate place I should put the money rather than a savings account?

Some additional information:

1. Yes, I expect yearly bonuses like this for the foreseeable future (as long as I stay at my current job). I'd roughly expect the bonus amount to increase at a rate of 10-15% per year.
2. I'm currently 33. So retirement is a ways off, obviously.

Answer 1

The OP invests a large amount of money each year (30-40k), and has significant amount already invested. Some in the United States that face this situation may want to look at using the bonus to fund two years worth of IRA or Roth IRA.

During the period between January 1st and tax day they can put money into a IRA or Roth IRA for the previous year, and for the current year. The two deposits might have to be made separately, because the tax year for each deposit must be specified. If the individual is married, they can also fund their spouses IRA or Roth IRA.

If this bonus is this large every year, the double deposit can only be done the first time, but if the windfall was unexpected getting the previous years deposit done before tax day could be useful. The deposits for the current year could still be spread out over the next 12 months.

EDIT: Having thought about the issue a little more I have realized there are other timing issues that need to be considered.

• If the decision is made to spread the deposits over a long period of time, there are still investment minimums that need to be considered. Assume $65K to be invested this year, that would be ~$5400 a month, If the decision is to fund several investments (Large Company, emerging markets, bonds) and if these are new funds, the deposits may have to be lumpier than desired to make sure that the minimums are reached. Keep in mind that the OP currently invests daily and weekly.
• In a similar concern, some funds/investment companies change fees and classes of funds based on the amount invested in their funds, getting to those minimums quickly has advantages.
• Another type of investment also has deadlines: putting money into a 529. Unfortunately to credit the investment for a year it must be done by December 31st. The amount of money that can be invested in one year, the maximum tax credit/deduction, and lifetime maximums depend on the state.

Answer 2

There have been studies which show that Dollar Cost Averaging (DCA) underperforms Lump Sum Investing (LSI). Vanguard, in particular, has published one such study.

Of course, reading about advice in a study is one thing; acting on that advice can be something else entirely.

We rolled over my wife's 401(k) to an IRA back in early 2007 and just did it as a lump sum. You know what happened after that. But our horizon was 25+ years at that time, so we didn't lose too much sleep over it (we haven't sold or gone to cash, either).

Answer 3

Canadian Couch Potato has an article which is somewhat related. Ask the Spud: Can You Time the Markets?

The argument roughly boils down to the following:

1. You expect the markets to rise, long-term.
2. It's generally impossible to determine, ahead of time, what the market is going to do.
3. Instead of timing the market, just buy your various asset classes and occasionally rebalance.

That said, I didn't follow the advice. I inherited a sum of money, more than I had dealt with before, and I did not feel I was emotionally capable of immediately dumping it into my portfolio (Canadian stocks, US stocks, world stocks, Canadian bonds, all passive indexed mutual funds), and so I decided to add the money into my portfolio over the course of a year, twice a month. The money that I had not yet invested, I put into a money market account.

That worked for me because I was purchasing mutual funds with no transaction costs. If you are buying ETFs, this strategy makes less sense.

In hindsight, this was not financially prudent; I'd have been financially better off to buy all the mutual funds right at the beginning. But I was satisfied with the tradeoff, knowing that I did not have hindsight and I would have been emotionally hurt had the stock market crashed.

There must be research that would prove, based on past performance, the statistically optimal time frame for dollar-cost averaging. However, I strongly suppose that the time frame is rather small, and so I would advise that you either invest the money immediately, or dollar-cost average your investment over the course of the year. This answer is not an ideal answer to your question because it is lacking such a citation.

Answer 4

I'm staring at this chart and asking myself, How long a period is enough to have an average I'd be happy with regardless of the direction the market goes?

3 years? 4 years? Clearly, a lump sum investment risks a 2000 buy at 1500. Not good.

Honestly, I love the question, and find it interesting, but there's likely no exact answer, just some back and forth analysis. You're investing about $40K/yr anyway. I'd suggest a 4 year timeframe is a good time to invest the new money as well. Other folk want to offer opinions?

Edit - with the OP's additional info, he expects these bonuses to continue, my updated advice is to DCA quarterly if going into assets with a transaction fee or monthly if into a no-fee fund, over just a one year period.