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I'm interested in timing with regards to long-term index investing.

Based on the advice of The Investor's Manifesto and others (John Bogle, William Bernstein) they stress how big a difference investing in a down market can make over the long-term, so my question is, if you suddenly ran into a bunch of money, would it be better to:

1) put in all the money in say (total stock market index) all at once?
2) wait for another recession / down market
3) put in a little every month, so you invest in good and bad times?

Assuming the strategy is the same for all, a long-term investment in a low cost index fund. I'm curious given what you see with the all-time high's of the S&P, does that change the timing for this type of investing at all?

  • Will Rogers: "Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it." – Pete Becker Sep 18 '15 at 12:10
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Trying to "time the market" is usually a bad idea. People who do this every day for a living have a hard time doing that, and I'm guessing you don't have that kind of time and knowledge. So that leaves you with your first and third options, commonly called lump-sum and dollar cost averaging respectively.

Which one to use depends on where your preferences lie on the risk/reward scpectrum. Dollar cost averaging (DCA) has lower risk and lower reward than lump sum investing.

In my opinion, I don't like it. DCA only works better than lump sum investing if the price drops. But if you think the price is going to drop, why are you buying the stock in the first place?

Example:

Your uncle wins the lottery and gives you $50,000. Do you buy $50,000 worth of Apple now, or do you buy $10,000 now and $10,000 a quarter for the next four quarters?

If the stock goes up, you will make more with lump-sum(LS) than you will with DCA.

If the stock goes down, you will lose more with LS than you will with DCA.

If the stock goes up then down, you will lose more with DCA than you will with LS.

If the stock goes down then up, you will make more with DCA than you will with LS.

So it's a trade-off. But, like I said, the whole point of you buying the stock is that you think it's going to go up, which is especially true with an index fund! So why pick the strategy that performs worse in that scenario?

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    The thing is: is the stock market overvalued? You are timing when to go in with lump sum. I would do DCA till you know the market is being hurt; when P/E's drop below 16 again - but then again who is to say that 22 isn't the new normal. I personally do it in two stages: 401k & IRA is automatic DCA and then I save up cash on the side to do lump sums once I see an asset that is getting destroyed for no reason but fear and speculation. – Ross Sep 18 '15 at 15:08
  • 401K is not DCA. Neither is saving up money for when you think a stock is undervalued. DCA refers to what you do when you have a large sum of money. – Kevin Sep 18 '15 at 17:58
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    Well how mine is set up it is: 'DEFINITION of 'Dollar-Cost Averaging - DCA' The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. If instead of buying a fixed dollar amount save up to create a lump sum to invest that would be a form of lump sum investing as opposed to using that same money for buying a set amount in $ each period. – Ross Sep 18 '15 at 18:03
  • That's a crappy definition. I'm assuming you got it from here: investopedia.com/terms/d/dollarcostaveraging.asp . That page is terrible. "Eventually, the average cost per share of the security will become smaller and smaller." That would only happen if the stock continued to drop and you were losing money. Why would you want to do that? Here is a much better definition: en.wikipedia.org/wiki/Dollar_cost_averaging – Kevin Sep 18 '15 at 18:19
  • Yeah read more into it; here since the OP mentions lump sum your definition is more accurate. Seems that even Vangard weighed in on it: Most popular commentary addresses DCA in terms of consistent investments made using current income [pressroom.vanguard.com/content/nonindexed/… – Ross Sep 18 '15 at 18:23
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The one thing we know for certain is that holding large amounts of cash isn't ideal - inflation will eat away at your wealth.

It's understandable that you're hesitant to put all your wealth in common stock. The S&P 500's price/earnings is 18.7 right now - a little high by historical standards. But consider that the S&P 500 has given a CAGR of approximately 10% (not inflation-adjusted) since 1970. If you don't time the market correctly, you could miss out on considerable gains.

So it's probably best to invest at least a portion of your wealth in common stocks, and just accept the risk of short-term losses. You'll likely come out ahead in the long run, compared to an investor who tries to time the market and ends up holding cash positions for too long.

If you really think US stocks are overpriced, you could look at other markets, but you'll find similar P/Es in Europe and Japan. You could try an emerging market fund like VEMAX if you have the risk tolerance.

Let's say you're not convinced, and don't want to invest heavily in stocks right now. In the current market, safe cash alternatives like Treasury bills offer very low yields - not enough to offset inflation tax. So I would invest in a diversified portfolio of long-term bonds, real estate, maybe precious metals, and whatever amount of stock you're comfortable with.

2

I have been considering a similar situation for a while now, and the advice i have been given is to use a concept called "dollar cost averaging", which basically amounts to investing say 10% a month over 10 months, resulting in your investment getting the average price over that period.

So basically, option 3.

  • Thanks, I've seen this as well. But then should the cash I have just sit as cash meanwhile? The issue is, what to do with money obtained as one lump sum – Jonathan Winters Jan 3 '14 at 3:24
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    DCA isn't usually the best way to invest a lump sum, you'll usually do better from upfront investment – David Hayes Jan 6 '14 at 20:43
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It's a tricky question w/out more context. If your only options are between stock/funds and letting it sit (i.e. in a saving or CD), I'd have to say option one is the way to go (but that's based on my situation, and you did ask "if you ..").

However, I think the true answer is "it depends." It depends on your risk tolerance and what are your short-term vs. long-term financial needs. Only after answering those questions you can then seek to strategize and diversify investment accordingly.

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Dollar Cost Averaging isn't usually the best idea for lump sum investment unless your risk tolerance is very low or your time horizons are low (in which case is the stock market the right place for your money). Usually you will do better by investing immediately.
There are lots of articles around on the web about why DCA doesn't work over the long term.

http://en.wikipedia.org/wiki/Dollar_cost_averaging

http://www.efmoody.com/planning/dollarcost.html

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