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Dollar cost averaging and getting into the market now.

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jay156
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Dollar cost averaging and getting into the market now.  Reply with quote  

Hey, a while back I talked with some of you guys about the Chase Strategic Portfolio. Well it's been almost a year since we bought into it and now we can start thinking about taking the money out with no BS early-withdrawal-penalty and putting it in an index fund.

But I hear that dollar cost averaging is the way to do it. We have about $115,000 in the chase portfolio. Is it best to put all of the money into the index fund now, or mete it out over some length of time? And if so, how long should that time be?

Also, since the S&P is up like 26% this year, is this even a good time to get in? It's bound to take a fall sometime soon, right? Or am I thinking about this all wrong?
Post Fri Dec 06, 2013 7:38 pm
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Wino
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quote:
Originally posted by jay156
I hear that dollar cost averaging is the way to do it.


This is true only 20% to 30% of the time. The other 70% or so, lump sum is the better deal. http://www.cbsnews.com/news/dollar-cost-averaging-does-it-produce-better-results/

Basically, no one knows what the market is going to do over the next 20 years so no one can tell you whether lump sum or DCA is the best strategy today.

What would I do? I'd probably spread the money into different funds. Also, I'd be looking at tax efficiency, diversification, and I would eschew bond funds. Your age will also play a role, as will your total asset base, job security, salary/income, marriage stability, number of children, risk tolerance, and current debt and inivestment levels. Really, there are too many factors for anyone but YOU to make this decision.

https://investor.vanguard.com/mutual-funds/all-vanguard-funds

Play with the link above to find appropriate funds. Just start clicking and un-clicking boxes, then come back here for questions, or find an adviser you can trust and ask him to make some recommendations. Remember "if it's too good to be true, it probably isn't." A lot of people though Bernie Madoff was an adviser to be trusted.
Post Fri Dec 06, 2013 8:37 pm
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oldguy
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DCA is good for incremental investing - ie, a monthly investment over a 30 years period. During low periods (2008?) you will be buying more shares with your monthly dollars and that will show up 25 or 30 yrs later in your account.

But for shortterm investing, studies have been done on DCA - and the result is inconclusive. Sinece the Market Average trends ever upward at 11%/yr it is best to buy sooner rather than later. OTOH, a single event could ruin your year.
When I have a large lump (sale of a rental house) I usually chicken out and break it into 2 lumps about 6 months apart. And to date, for what it's worth, I've been wrong every time - lol.

As for "a good time to get in" - I became wealthy AFTER I quit trying to time the market - again, for what it's worth.
Post Fri Dec 06, 2013 8:46 pm
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littleroc02us
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I also have read many studies about Dollar cost averaging vs. lump sum investing and I've seen the results swing both ways. I have currently dollar cost averaged, because for me its a more conservative way of averaging the ups and downs of the market. I think if I had a large lump sum like yourself, I'd just put it all in the market and diversify it, because you cannot time the market and who knows the S&P 500 may be at 1800, but it could go to 2500 or it could drop to 1000. It's better to play ball then sit on the bench.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Fri Dec 06, 2013 9:35 pm
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coaster
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My understatnding is DCA only applies to cash -> equities; you're talking equities -> equities, so it doesn't really apply to your case, I don't think. And any interim interval spent in cash would be "timing the market", as noted above. Since the sole purpose of DCA is to be a method to avoid timing the market, it doesn't make any sense almost any way you want to look at it. Wink

~Tim~
Post Sat Dec 07, 2013 6:32 am
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Wino
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Re: Dollar cost averaging and getting into the market now.  Reply with quote  

quote:
Originally posted by jay156
Is it best to put all of the money into the index fund now, or mete it out over some length of time?

And if so, how long should that time be?

Also, since the S&P is up like 26% this year, is this even a good time to get in?

It's bound to take a fall sometime soon, right?

Or am I thinking about this all wrong?

I realized that we didn't really answer your questions. We answered the first question about DCA, but ignored the rest.

How long? Experts say that you should never DCA for more than 12 months.

Is it even a good time to get in? Well, 5 years ago would be a much better time to get in. Assuming you have no time machine, your only other choices are "now" or "later." No one really knows the answer to that one, but we've tried to give you guidance according to what has happened historically. Basically, it has been 70% lump sum versus 30% DCA.

Taking a fall "soon." Well, it's definitely going to go down some time. And it's also going to go up some time. You are suggesting timing the market, and if you plan to do so, then DCA is your best bet to come out ahead. "Just waiting" means you'll lose out on all gains between now and later (if the 70% side wins), and also, people have a tendency to "buy high and sell low," which goes exactly against the common dictum for winning in the market.

Are you thinking about it all wrong? Unfortunately, "Yes, you are thinking about it all wrong." The index funds tend to follow the economy as a whole according to its strategy. For instance, a total market fund tends to track the US economy as a whole, while the S&P 500 fund just follows the top 500 companies, the composition of which can change over time. International index funds tend to follow the world economy.

Given the above, you're asking yourself, "Is the US economy going to continue to grow, or is it going to stagnate or shrink?" Again, I have no crystal ball, but I do have a pair of glasses, so I can look at past trends.

http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

If you take a look at that chart (Dow Jones 100 years), you can see that for almost every major downturn, there is a specific trigger such as "assassination of JFK" or "Savings & Loan debacle of 1987." Also, each of those triggers only caused a percentage down turn for a very, very short period of time, with almost immediate gains. Of course, if you bought exactly at the point just before a down turn occurred, it could be four years or more before you got back all of your immediate losses, but the odds of that are very slim. Note that "very slim" does not mean "cannot happen." This is the thing that DCA tends to "smooth out."
Post Sat Dec 07, 2013 3:19 pm
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blixet
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If you are going from assets in the stock market to other assets in the stock market, it probably isn't going to matter significantly. If it bothers you, try lump summing half and DCAing the other half over 6-12 months.

Information is more valuable sold than used – Fischer Black
Post Sat Dec 07, 2013 3:58 pm
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jay156
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thanks guys. these responses are all very helpful, especially the study of DCA vs lump sum.

We went to talk to a financial planner last night. He's asking 1.5% to manage our investment account. 1.0% when the value goes over 250,000. Is that a reasonable fee? I thought I remembered reading somewhere that the average fee for a financial planner was like 1%. Maybe I'm wrong.

Either way, it sounds pretty high. I'm currently paying 1.6% into the actively managed fund from the bank, so we won't even be really that much ahead.
Post Fri Dec 13, 2013 7:36 pm
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oldguy
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quote:
We went to talk to a financial planner last night. He's asking 1.5% to manage our investment account. 1.0% when the value goes over 250,000.


It sounds like you are talking to a salesman, a planner would be fee-based.


quote:
I'm currently paying 1.6% into the actively managed fund from the bank


Unmanaged funds do better than 85% of the managed funds - the reason is that the generic US market (unmanaged)has a longterm average return of 11%/yr. A fund manager would need to consistently get a 14%/yr return, 3% for overhead, 11% for you. And it's extremely difficult to get 14%/yr, year after years, from an 11%/yr market.
Why not use an unmanaged index fund, the fee is between 1/10 the and 1/20th of one percent.
Post Sat Dec 14, 2013 1:38 am
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littleroc02us
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What's interesting is that my unmanaged Vanguard Index fund actually lowers it's expense rate when I get to a certain limit, so it actually encouraging that the higher your balance in a particular fund actually benifits your portfolio vs a manager taking 1.6% off the top.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Sat Dec 14, 2013 4:41 am
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coaster
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No sense in paying a financial planner to invest your money in an index fund. Laughing

~Tim~
Post Sat Dec 14, 2013 5:51 am
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jay156
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quote:
Originally posted by oldguy
quote:
We went to talk to a financial planner last night. He's asking 1.5% to manage our investment account. 1.0% when the value goes over 250,000.


It sounds like you are talking to a salesman, a planner would be fee-based.
Well, his fee is based on a percentage of what he's managing. What do you mean? That he would just charge a flat yearly fee? Or an hourly fee?


quote:
Unmanaged funds do better than 85% of the managed funds - the reason is that the generic US market (unmanaged)has a longterm average return of 11%/yr. A fund manager would need to consistently get a 14%/yr return, 3% for overhead, 11% for you. And it's extremely difficult to get 14%/yr, year after years, from an 11%/yr market.
Why not use an unmanaged index fund, the fee is between 1/10 the and 1/20th of one percent.
Ha, that's the number I've been hearing on every website I've visited, and when I mentioned it to the salesman at the bank, he told us the number is only like 60%. I don't trust him at all.

quote:
Originally posted by coaster
No sense in paying a financial planner to invest your money in an index fund. Laughing
Very true. But I feel like I'm going into unknown territory doing it myself. I don't think I'd want to put the whole amount into the index fund, would I? Shouldn't I also buy foreign index funds? Bonds? Like, diversify and stuff? That's what I don't understand and probably need to be advised on.
Post Fri Dec 20, 2013 1:44 pm
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oldguy
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quote:
Ha, that's the number I've been hearing on every website I've visited, and when I mentioned it to the salesman at the bank, he told us the number is only like 60%. I don't trust him at all.


Now that's funny - ie, he's trying to sell his service by bragging that only 60% fail?
BTW, don't go to a bank for investing - banks are for banking - ie, checking, savings, CDs, car loans. But they are notoriously poor at investing, you need a brokerage - preferable a no-load company such as Vanguard or Fidelity.
Post Fri Dec 20, 2013 10:08 pm
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dinarcurrency
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Dollar cost averaging  Reply with quote  

With dollar cost averaging, you invest a certain amount of money at a certain interval — say, $100 per month. The amount and interval don’t matter. Being consistent does. To make it work, you must invest into something volatile, where the price per share changes often. Dollar cost averaging into a savings account doesn’t work; doing so into the stock market does.
you should not use DCA when you have a lump sum to invest. Instead, you should invest your lump sum all at once.
Over long periods, investments tend to rise in price. That means you’re likely better off investing sooner rather than later.
Consider the alternative of investing slowly over time. Say you invest 10% of your money each month. It will take you 10 months to be fully invested; in the first month, 90% of your money is still in cash earning virtually nothing. The drag on that 90% will undo much of the benefits enjoyed by the 10%.
Post Sat Jan 04, 2014 11:10 am
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