# Investing lump sum into couch potato portfolio - dump it in now or slowly?



## Franko (Mar 31, 2012)

So I'm in the middle of revamping my investment strategy, and I'm currently 100% cash. I'm torn between just dumping it back into my new portfolio and forgetting about it (the proper couch potato method) or buying in some now (say 25-50%) and holding the rest in cash/savings account to wait for a market pullback.

Is this worth it? Thoughts/comments/suggestions much appreciated!

Franko


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## Just a Guy (Mar 27, 2012)

Well, if you don't pull the trigger and invest, you are guaranteed to miss the movement of the market, whichever way it goes. I'd bet every investor has lost some money on an investment at some point, most consider it the price of education. I've personally found that if I invest in things I understand, I have more winners than losers, so overall things go up in value. 

I've yet to find anyone who's perfected market timing, but I've met many who've regretted not getting started earlier.


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## cainvest (May 1, 2013)

It could go either way and if you're using the couch potato method you are not going to back out of the market if things go down. If you have a long time before retirement you'll have a number of corrections ahead of you, might as well start now.


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## snowbeavers (Mar 19, 2013)

Don't try and time the market! I was in a similar position to you in late December and was waiting...and waiting as we were on the edge of the so called "fiscal cliff". Someone gave me similar advice and I just bought at the current rate and my funds went up over 12% since. You really don't know and buyer's remorse is a terrible thing. In the long run, it doesn't matter since you'll (presumably) be buying over a long period of time. What you should be hoping for as a long passive investor is long periods of bear markets where prices will be cheaper.


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## doctrine (Sep 30, 2011)

Go back 20 years and look at stock prices or market indexes. Is there really any point in waiting one month or another? However, DCA'ing instead of lump sum can protect your downside risk at the cost of upside potential. You could spread your purchases over 12-24 months, but I wouldn't recommend waiting 3-4 years.


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## uptoolate (Oct 9, 2011)

Studies suggest that going all in usually beats DCAing in terms of return but many suggest that DCAing in may let you sleep a bit better. This may be especially true with US markets hitting all time highs. At the end of the day, if you have a long time horizon and alot of human capital remaining then even a loss taken with an all in strategy shouldn't hurt too bad. Good luck.


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## My Own Advisor (Sep 24, 2012)

I'm with doctrine. Get in the market and stay in the market. When things crash, just buy more.


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## GoldStone (Mar 6, 2011)

Saw this stat today:

Buy S&P500 on a random day in the last 50 years. 73% of the time the market is up a year later from the day you buy.

One caveat though... the amazing bull market of the 1980s-1990s skewed the stats.


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## larry81 (Nov 22, 2010)

There an article on DCA vs. Lump Sum on this month moneysense magazine:
http://www.simplesmartadvice.com/uploads/PDFs/The myth of DCA.pdf

Also this very well done whitepaper from our friends at vanguard:
https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf


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## none (Jan 15, 2013)

I'm not totally sure about this. The critical aspect of the simulation in that article is (I think but it's lacking detail) that random points were taken and 67% of the time you came out ahead if you went all in.

What would be a little more interesting is to take a bit of a bayesian perspective of 'if I invested completely after the index increased by **% in the last 3 months (or something) is DCA or lump sum better"?

Also the article is lacking detail in - for those 67% of the times, what is the distribution of ahead vs behind compared to those that did DCA what is the distribution of ahead vs behind?

Interesting questions. Perhaps I should write that research paper....


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## fatcat (Nov 11, 2009)

larry swedroe: http://www.cbsnews.com/8301-505123_...ost-averaging-does-it-produce-better-results/


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## none (Jan 15, 2013)

Thanks for the link - that nicely addresses the concerns that I had. Some of the differences truly are pretty weak and although no statistical tests were done I'm sure the variance would make them not substantially different (eg. ex 6).

One thing to take home though I think is LS or DC - one may be right more often but if you don't do either you will definitely miss out. Sitting on the sidelines losing value to inflation is obviously the wrong decision and 1 out of 3 times with DC you'll do better than a lump sum.

Frequentist simulations like that can be a little frustrating when employing them in real life because unfortunately things are not repeatable.

Thank you for the link.


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## donald (Apr 18, 2011)

One major thing(it was addressed)The emotional aspect is bloody tough(i got ''lucky'' i guess,2 yrs ago i plunged)It is a bit gut wrenching using the approach(doesn't matter if you have 25+ yrs imo)even if you catch a 7-8% correction you will be sweating bullets begging for the relief/stabilizing rally and run the risk of making the sin of all mistakes and panic selling(it can happen,don't underestimate fear/emotions)And then you can be out again with the same problem(and your psyche is double worse the wear)
Dca is the prudent play imo(even in a correction is it nice to have dry powder,which you don't have if you lump)

Id be slightly weary of buying into this market(i think it is a little a ahead of it self m.o..............i haven't seen as much fear news in the media(it was at ridiculous levels even a yr ago,sure china slowing ect but i don't know where we are in the be greedy when others are fearful and fearful when others are greedy.The dips are being bought but it feels like were due for a healthy pullback,could be completely wrong though!i would dca @ this time.


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## james4beach (Nov 15, 2012)

Franko said:


> So I'm in the middle of revamping my investment strategy, and I'm currently 100% cash. I'm torn between just dumping it back into my new portfolio and forgetting about it (the proper couch potato method) or buying in some now (say 25-50%) and holding the rest in cash/savings account to wait for a market pullback.


I strongly recommend 'scaling into' your positions, which means spacing out your buying over time. However I don't think you should try to "wait for a market pullback"... that's going to be just about impossible to time.

By scaling in, I mean spread out your purchases over a year on a schedule, not just when you feel like it. e.g. buy 1/4 today, 1/4 in 4 months, then in 8 months, 12 months.


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## james4beach (Nov 15, 2012)

none said:


> one may be right more often but *if you don't do either you will definitely miss out*. Sitting on the sidelines losing value to inflation is obviously the wrong decision and 1 out of 3 times with DC you'll do better than a lump sum.


This statement is incorrect ... that you'll *definitely* miss out sitting on the sidelines. Whether or not you're "missing out" by not being in stocks depends on whether or not the stock market goes up, and over how long a period.

It is not universally true that you're simply better off buying stocks as soon as you have money to buy stocks. Yes, it was true during the period 1980-2000. In other periods, you have been better off *not *buying stocks.

For example take the last six years, May 2007 to May 2013. In this period the TSX (including dividends) is up 3.4%. If you had kept the money in an interest earning cash account? The total return would be more like 13%. With GICs, even higher - around 25%.

So there's a time period (very recent!) where you missed out by going INTO the market. You had higher returns sitting in cash, and over quite a long period... six years!


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## snowbeavers (Mar 19, 2013)

james4beach said:


> This statement is incorrect ... that you'll *definitely* miss out sitting on the sidelines. Whether or not you're "missing out" by not being in stocks depends on whether or not the stock market goes up, and over how long a period.
> 
> It is not universally true that you're simply better off buying stocks as soon as you have money to buy stocks. Yes, it was true during the period 1980-2000. In other periods, you have been better off *not *buying stocks.
> 
> ...



Which is why we are talking about long term investing. 5-6 years is not a long time period and if you are opening up a couch potato portfolio, you are looking at a period of 20+ years. Find me a 20 year time period where GICs outperformed an index portfolio of stocks/bonds. 

I would argue that during that period of May 2007-May 2013, you should be investing MORE in stocks than you would normally. This is when you take money out of bonds and buy more stocks (bonds were up 11.28% excluding dividends in this period). This discounted price will pay hugely 15 years from now. As mentioned earlier, "be greedy when others are fearful"


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## dogcom (May 23, 2009)

Donald is right DCA is the way to go then trying to sweat through a big correction. I find these arguments seem to come at market tops as the market seems to be going up without any set backs. I remember before the 2008-2009 meltdown everyone saying the same stuff about being all in now and all the long term talk. DCA is the best way to navigate through this and you can sleep at night.


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## snowbeavers (Mar 19, 2013)

nvm


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## james4beach (Nov 15, 2012)

snowbeavers said:


> Which is why we are talking about long term investing. 5-6 years is not a long time period and if you are opening up a couch potato portfolio, you are looking at a period of 20+ years. Find me a 20 year time period where GICs outperformed an index portfolio of stocks/bonds.


Japan

That being said, I agree that if your time horizon really is 20+ years then stocks are likely to have superior returns (except in Japan where you still lost money).

But I want to drive home the point that stocks don't inevitably go up over time. There's no such guarantee and the market doesn't owe you a positive return. Any stock investment is a gamble -- including couch potato index investment.

If for example it turns out that central bank stimulus and QE has dramatically inflated corporate earnings and suppressed losses, then possibly stocks could go down for a long time. I'm not saying it will happen, but every stock investment is a gamble -- even if you're willing to wait 20 years.


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## dogcom (May 23, 2009)

I would like to add that everyone is a fan of all in, buy long term and all is fine, look back at history and all that rot when markets are high. When we are low like in the fall of 08 or the spring of 09 you hear the DCA talk and don't put it all in because it could go far lower. The thing is now is a great time to DCA especially if we get a large correction in the market as you can make money from going down and then up again. Lump sum or all in is better after big corrections as you can just enjoy the upside with far less downside.

OK you argue you can't time the market but you can see when things look expensive like now or cheaper like after a decent correction. DCA when it is expensive means your still getting in, but you will have cash ready for a big correction if it were to happen. When it is down hard like in 08 I am still in favor of DCA because we don't know how far things can go down but at least you know it isn't the top your buying at. So it is almost always a bad idea to go all in unless you have nerves of steel and a huge time frame and it is easy for people here to say go all in when everything is up and rosy.


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## RedRose (Aug 2, 2011)

*Thank YOU Dogcom for your summary.* My head gets spinning with all this reading and wondering which way to go.
Your comments are very much appreciated. :encouragement:


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## CanadianCapitalist (Mar 31, 2009)

OP's does not have a *new* pile of cash. OP is simply fine tuning his investments, presumably by dumping high-fee funds for low-fee funds. Therefore, what OP is doing is timing the markets -- he is hoping to sit out a few months in cash, hoping markets will pull back and he can presumably get in cheaper. Maybe it will, maybe it won't. Just roll the dice and only time will tell which choice turned out better.

If I were OP, I would lump sum right away. But for someone deciding to DCA, I think James' idea is best. Make a plan to invest, say 25% now, 25% on August 1st, 25% on November 1st or some such schedule and *follow through*.


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## fatcat (Nov 11, 2009)

CanadianCapitalist said:


> and *follow through*.


cc has it right ... it's the follow through that gets most of us ... when the scheduled buy arrives we start to second guess and time the market ... which is why the drip is so appealing ... it takes it of your hands and forces you to dca


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## dogcom (May 23, 2009)

RedRose said:


> *Thank YOU Dogcom for your summary.* My head gets spinning with all this reading and wondering which way to go.
> Your comments are very much appreciated. :encouragement:


Your welcome redrose.


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