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A risk-neutral person, intending to not reach the IRA retirement age, earning approx, $30,000 per year, in his late 20's has $100,000 in a savings account and wants to end up with:

80% Stock (of which 27.5% is international, the rest US-domestic)
20% Long-Term Bond

Immediately buying all the funds exposes the person to high volatility, but periodically investing a small amount erodes the value of the money being transferred through inflation and lost opportunity.

A compromise would be to dollar-cost-average $50,000 over a week (10k per day) into a short-term-index fund, putting the remaining $50,000 into money market (in one day), then dollar-cost-averaging from the money market into the desired asset allocation (over 6 months, say), then converting the other 50k that were put into short-term bonds into money market and then dollar cost averaging those 50k into the asset allocation as well (again, over 6 months to maintain the same rate).

Of course, the $100,000 could be put into short term bonds immediately (over two weeks at 10k per day), and then dollar cost averaged into the asset allocation over a year. However, the latter option causes taxable events on each exchange and I'm not sure how much short term capital gains are usually gained with short term bonds.

My question is which rate of dollar-cost-averaging is appropriate (is the entire sum over one year reasonable?) and where the intermediate pool of the "funds to be invested" should be stored during dollar cost averaging into the main asset allocation (money market, short-term bond or a mix).

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    "intending to not reach the IRA retirement age" <--- does this mean you plan on dying before turning 59.5? Just wondering what was meant here. – JB King Mar 23 '14 at 3:42
  • Just want to exclude IRA/RothIRA etc, this is a question for a taxable account. Assume the person has a unhealthy lifestyle or something along those lines. – Wuschelbeutel Kartoffelhuhn Mar 23 '14 at 4:01
  • Ok. I'll ask, why 27.5%? Where did that number come from? – JoeTaxpayer Mar 23 '14 at 11:49
  • I think Gus Sauter once said they recommend 30% and an article I read said between 15% and 25%. Since I value Gus Sauter's opinion, I just took the average of max(.15,.25) and .3 – Wuschelbeutel Kartoffelhuhn Mar 24 '14 at 3:56
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DCA is not 10%/day over 10 days. If I read the objective correctly, I'd suggest about a 5 year plan. It's difficult to avoid the issue of market timing. And any observation I'd make about the relative valuation of the market would be opinion. By this I mean, some are saying that PE/10 which Nobel prize winner Robert Schiller made well known, if not popular, shows we are pretty high. Others are suggesting the current PE is appropriate given the near zero rate of borrowing.

Your income puts long term gains at zero under current tax code. Short term are at your marginal rate.

I would caution not to let the tax tail wag the investing dog. The fellow that makes too many buy/sell decisions based on his taxes is likely to lag he who followed his overall allocation goals.

  • If you believe that the market is efficient (a lot of things point to this theory), then DCA does not make sense, as it only help the variability of the first day. With a portfolio you are exposed to many days of volatility. If you believe in being able to time the market (I don't discredit that theory), DCA makes sense. I believe 5 years is much too long though. In that case most of the intermediate pool should be invested in bonds IMO. – Wuschelbeutel Kartoffelhuhn Mar 25 '14 at 12:11
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I up voted JoeTaxpayer but i would like add a couple of things.

Dollar Cost averaging over a 5 day period is in no way practical. If you get a 1% swing in that time that would be quite a lot.

Personally I think 5 years is way to long. When markets go down they go down fast.

I would suggest 1 to 2 years investing quarterly.

I would hate seeing you miss out on market gains for a 5 year period on the last of your money.

The whole point of Dollar Cost averaging instead of market timing is the mantra

"Its about time in the market not timing the market" So if you have money on the sidelines for years you are missing out on your time in the market.

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