Any problems with going "all in" suddenly into investments?

Question

TL;DR: Go suddenly almost all in ~$400k-450k in an index fund, or is that crazy?

In mid 40s, married, with a good amount of earned/scrimped cash, small retirement accounts ($60k total), and self-bashing regrets on what might have been by now had I invested.

But all I can do now, really, is move ahead--I want to finally change this pattern, possibly this week. And I'm thinking of just going nearly all in: something like buying an index mutual fund with Vanguard or someone and just putting most of our cash, like $400-$450k, in it and retaining maybe $50k (?) as an emergency buffer in 2% interest bearing accounts. I know the market is high, but then again, the conventional wisdom seems to be to ignore that.

Is this insane? Or is insane not to?

My goals, ideally, would be:

• To move closer and closer to financial independence and early semi/retirement
• In the meantime, we're willing to work a few more years in more lucrative ($40k-$100k) jobs. Right now we're barely earning anything, though.
• Really just build the warchest.
• Look ahead to a home purchase, possibly (Range? $80k-$300k depending on area)
• And stop scrimping so much.

I'm, of course, afraid that I will have waited out the last decade+'s massive growth only to dump our life's savings at a potentially very weird time in U.S. history: this president seems a major wildcard), PE ratios are very high apparently... And maybe we could see another 2008 crash but no recovery or...or who knows. That would just be the ultimate body slam--after missing out on what would have made us basically retired by now, to then set us back 15 years in savings due to a "bet" on the market.

So...your thoughts on someone like me going, probably impulsively (after a loooong wait) almost "all in"????

Are there any tax consequences of buying in with such a large chunk? Other consequences I should know about?

Is keeping $50k out of the market too risk-averse? I know JoeTaxpayer here has discussed being 100% in the market.

Answer 1

We can't know the future, of course, but we know that on average it's better to invest a lump sum. We can look at some periods of recent history to get a sense of the difference between a lump sum 450k investment and maybe say 5 years of 90k.

Using S&P 500 return rates, let's say you started investing on Jan 1, 2008:

Year    S&P Return  Lump      5 year spread
2008    -36.6%     $285,525      $ 57,105 
2009    25.9%       359,590      185,264 
2010    14.8%       412,881      316,058 
2011    2.1%        421,552      414,585 
2012    15.9%       488,537      584,764 
2013    32.2%       645,601      772,766 
2014    13.5%       732,886      877,244 
2015    1.4%        743,000      889,350 
2016    11.7%      $830,228      $993,759 

Here, spreading your investing over 5 years earns you an extra $163k. Starting a year later, the same strategy would earn you $327k less than a lump investment:

Year    S&P Return  Lump    5 year spread
2009    25.9%       566,730      113,346 
2010    14.8%       650,719      233,482 
2011    2.1%        664,384      330,275 
2012    15.9%       769,955      487,057 
2013    32.2%     1,017,496      762,580 
2014    13.5%     1,155,061      865,681 
2015    1.4%      1,171,001      877,628 
2016    11.7%    $1,308,477      $980,661 

I looked at some other periods, but the story doesn't change from what we already knew; you can reduce risk of losing a big chunk due to a bad year, but it comes at the cost of potential gains. Perhaps you could make a killing by waiting for the next down-turn and buying on the cheap, or maybe you'll just be wasting time and money as the market enjoys sustained growth. I'd go with a lump, trusting the averages; but you're right, another 2008 with no recovery would suck.

As for holding $50k back it depends primarily on your monthly budget, many people suggest a 3-8 month liquid emergency fund, I like 6 months. Go with what you're comfortable with.

Answer 2

The obvious risk is that you might buy at a time when the market is particularly high. Of course, you won't know that is the case until afterwards.

A common way to reduce that risk is dollar cost averaging, where you buy gradually over a period of time.

Answer 3

Your reaction to bad news is the greatest risk.

Are you going to panic and pull all your money out when the market falls 20%? It will. Someday it will. The question is, will you have the stomach to stay the course and keep your money invested when the sky is falling and everyone is screaming that things are definitely going to get worse?

If not, the timing of when you invest will matter not at all.

My advice: Go all in ASAP. Remember that you don't care where the market is in 2 years. You're in your mid 40's, you care where the market is in 20 years. And 20 years from now, when you're in your mid 60's, you'll be caring about where the market is even further into the future.

Answer 4

Your urge to invest is a good one. If you don’t invest your money, you're probably leaving about two thirds of it on the table. By the time you need the money (without knowing your exact future withdrawals, and taking national averages into consideration), investing would have grown it by three times.

As far as how much money you should invest...I invest everything I'm not going to use in the next month or two. My advisor is able to monitor my bank accounts and sweep any unused cash into investment accounts. Using AI, they're able to figure out exactly which days I'll be needing cash then put it back in my accounts before I need it. 1% of my portfolio is always kept in cash, for emergencies.

With investing, there are lots of things to consider. You need to decide what to invest in - spread your money over many different asset classes - monitor market trends - have a plan for market ups and downs - regularly rebalance - maneuver the fun world of taxes.

Basically - asset management.

Vanguard mutual funds are an easy, affordable way to spread your money over many different assets, but they don't offer much when it comes to asset management. I'd suggest you find a flat fee advisor (no more than 1% of your managed assets) who listens to you, determines your goals, creates a plan based on upon, then executes it with no commission or execution costs. In this particular vein, robo advisors are the best bet. I don't want to come across like I'm selling something, however, I have had much satisfaction with online digital advisors. Hope this helps.

Answer 5

No one knows if the market is high right now. To know that you would need to compare it to the future, not the past.

If you put all your money in right now, you run the risk of putting it in at what turns out to be a bad time. If you spread it out, you will for sure put some of it in at a bad time (either the stuff you put in now, or the stuff you put in later). The strategy that, on average, will make you the most money is to put everything in now. If your risk tolerance allows that (it sounds like it does) then I think going all in makes sense.

There really aren't significant downsides to buying a ton at once. You aren't going to move the needle on a big Vanguard fund with that amount and there isn't a tax consequence or anything to buying. Of course, when you sell, you will need to pay capital gains tax on any gains, but that's a later chapter.

The bigger consideration is to be smart right now about avoiding taxes. If your income is low, max out your Roth IRAs. If you need to you can later use that money for a house or you can pull the contribution part out at any time if you want without a penalty.

Is a $50K buffer too much? Normally I would say yes, it's excessive. I have 5 rather expensive kids and I keep $20K in cash, which seems high, if anything. However, if you are unemployed or your income isn't covering your expenses, then keeping a larger pot in cash makes good sense until your cash flow firms up. Setting $50K or something close to that aside sounds a lot like something I would do in your shoes.

BTW where are you finding a savings account that pays 2%?