By Josh Katzowitz, WCI Content Director
One of the classic investing questions that seems to have a right answer but maybe actually doesn’t is whether one should lump sum or dollar cost average a large amount of money. Dr. Jim Dahle, WCI’s founder, makes it clear what he thinks in a post from 2013 bluntly titled Dollar-Cost Averaging (DCA) Is for Wimps.
His four reasons why you should lump sum a windfall, inheritance, or rollover (throwing the entire amount of money into the market at once) instead of DCAing it (investing the money into the market a little at a time) are as follows:
- The market generally goes up.
- You miss out on the dividends for those shares that weren’t invested originally.
- It's a hassle and opens the door to behavioral mistakes.
- You get lower expected returns.
Theoretically, I completely agree. Get your money into the market as soon as you can so it can start working for you immediately. But we as investors find ourselves in an interesting spot these days. The stock market hit an all-time high in December 2023, blasting through the 37,000 mark for the first time ever, and it has stayed in that general vicinity ever since. Meanwhile, some investors are predicting that a recession will hit the US in 2024.
How do those two factors change the lump sum vs. DCA debate, if at all? I decided to ask a few financial experts their thoughts. Here’s the scenario I presented to them.
“An investor has just rolled over a 401(k) from an old employer into the 401(k) of their current employer. It's worth about $150,000. It’s a substantial sum of money, and since the market has been at or near its all-time high since mid-December 2023, the investor finds themself a little paralyzed about what to do. Now that the Dow is exceeding 37,000, they are worried about throwing the entire amount of money into the market, especially with the whispers of a possible recession in 2024. The stock market just went up 20% in 2023. Can we really expect anywhere close to those gains again? Plus, the investor just read an article that quoted a financial analyst who said that December 2023 was “kind of a sloppy rally” because companies were “wanting to put things on their books maybe or cover shorts.” So, that doesn't sound great, right?
Here are the options:
- Lump sum all $150,000 right now.
- Dollar cost average it: invest $50,000 in January, $50,000 in February, and $50,000 in March.
- DCA it and spread it out even more: $12,500 each month until the end of 2024″
What should this investor do?”
Lump Sum vs. Dollar Cost Averaging in 2024
I asked WCI Columnist and dentist-turned-financial-planner Tyler Scott, RFK Capital Management Founder Ryan Kelly (who recently wrote a guest post on the transition from firing your financial advisor to becoming a DIY investor), and Jim Dahle their thoughts on the matter. Here’s what they said.
That Money Was Already Invested in the Market
Dr. Tyler Scott
If it smells like market timing and walks like market timing, well then . . . it's market timing. In the evidence-based and rational universe of this blog, we don't believe in market timing so there is no real decision here. The money needs to be invested today. I would say that even if this was an actual windfall of new money rather than just a perceived windfall of money that was already yours, but in this case, it’s an even easier decision to go with the lump sum choice because the money was ALREADY invested in this allegedly overpriced market. So, just put your money back in the market where it was before your rollover and get on with stressing about something else in your life.
I have more nuanced empathy for someone who receives a sum of money that has not ever been invested in their own financial plan—like an inheritance, the proceeds from the sale of a home/business, an insurance payout, etc. In this case, the evidence still points to a lump sum contribution regardless of anyone’s arbitrary perception of where the stock market is today along an unknowable timeline of future performance. However, even though the lump sum is more likely to produce better long-term returns than DCA, the differences are probably not statistically significant in affecting your long-term goals (i.e. it’s not like you will be able to retire a year earlier by doing the $150,000 lump sum compared to the DCA option).
In my observation, personal finance is about 80% personal and only 20% finance. We talk about the finance side of that equation a lot and justifiably so, but the personal side doesn’t get nearly enough attention, especially relative to its impact on our real world decision making. None of us are the living embodiment of homo economicus. Rather we are all emotional creatures that are subject to a wide array of feelings that, while perhaps irrational, are nonetheless impactful on how we behave and how well we sleep at night. So, if employing a DCA strategy produces slightly suboptimal financial outcomes yet far more optimal peace-of-mind outcomes, then it’s a no-brainer to go with DCA.
More information here:
Jumping into Deep Water vs. Slowly Wading In
Ryan Kelly
I believe the most logical decision is to lump sum. There are two basic reasons for this. First, these are funds that were fully invested only very recently, and you’re only in cash because the rollover process required that previous investments be liquidated. And second, according to research from Vanguard, lump sum investing outperforms dollar cost averaging 68% of the time.
However, while the logical decision is to lump sum, it's not necessarily the right decision for every investor. This is because successful investing requires the management of emotions. Therefore, if lump sum investing causes too much trepidation and anxiety, then DCA can be an effective way to help manage those emotions. As is the case with swimming in cold water, some prefer to jump right into the deep end, whereas others prefer to wade in gradually. One approach is not necessarily better than the other approach.
If you are an investor who prefers the DCA approach, then the key is to write down your DCA plan and stick to it. For example, if you have $100,000 to invest, then you could write down that you will invest into your target allocation in four equal installments on January 15, April 15, June 15, and August 15. If you don't write your plan down, then you run the risk that the inevitable day-to-day fluctuations of the stock market will cause emotion to drive your entire process. You want to act and not react.
The calendar years this century with the most stock market turmoil were arguably 2008, 2009, and 2020. In 2008, the S&P 500 declined more than 40% over a three-month period. In 2009, the S&P 500 declined by 27% for the first two months of that year. I remember this time being especially scary given that it followed such a disastrous 2008 for the stock market. And in a one-month period in 2020, the S&P 500 declined by 34%.
You would think that in these calendar years that DCA did way better than lump-sum investing. That would make sense given the calendar years each included such a severe stock market decline.
However, DCA actually underperformed lump sum in 2009. And in 2008 and 2020, it didn't really do that much better than lump sum investing. This reminds me of a point John Bogle made in one of his books that even for mutual funds that do outperform index funds over a long period, the amount of outperformance is so often quite modest.
I think a good investment benchmark to use is the Vanguard LifeStrategy Growth Fund (VASGX). It has about 50% in U.S. stocks, 30% in international stocks, and 20% in bonds. From my experience and observation, I think it's an allocation that is pretty close to the target asset allocation of a large portion of White Coat Investor readers—especially those under the age of 50.
The chart below shows the end-of-year values (for 2008, 2009, and 2020) of a $100,000 investment in VASGX with both a lump sum approach and a DCA approach. For the DCA approach, I assume four equal installments of $25,000 on the following dates: January 1, April 1, July 1, and October 1.
My point is that even if 2024 does bring a severe stock market decline, recent market history suggests that the DCA approach may not be all that much better compared to the lump sum approach. And there's even a decent chance that the lump sum approach would still do better than the DCA approach.
More information here:
4 Frugal Things I’ve Done Lately
Would You Quit Your Job as a Lottery Winner?
The Stock Market Is Usually at All-Time Highs Anyway
Dr. Jim Dahle
There are few on the internet who feel as strongly as I do about this question. My article on this subject, written many years ago, is titled DCA is for Wimps, and I still believe that. While DCAing a lump sum over a few months or even a few years does occasionally outperform investing the lump sum as soon as you get it, that's not the way to bet, even at “all-time highs.” What most people don't realize until they look at a long-term stock market chart is that the stock market is usually at or near all-time highs.
Check out this chart from StockCharts that shows the Dow Jones Industrial Average from 1900 to the present to see what I mean (click the image to enlarge it).
Besides, your money will be fully exposed to the market as soon as you finish DCAing. If you can't emotionally handle that now, why would you somehow magically be able to handle that in three months or 12 months? Maybe you should dial back your asset allocation to something where your fear of missing out precisely equals your fear of loss.
Invest the lump sum, quit worrying about it, and go spend your time doing something more worthwhile.
More information here:
Some Sobering (and Scary) Statistics on People’s Retirement Preparedness
After reading those opinions, the investor said they felt better about the decision and immediately invested the money. It’s probably the right move, but even if not, it’s a decision the investor doesn’t have to think about again—and that’s valuable too.
Money Song of the Week
I’ve always enjoyed songs that fight against The Man, whether it’s Rage Against the Machine railing against corporate greed or Taylor Swift eviscerating the patriarchy. Today, let’s look at Ben Harper’s “Excuse Me Mr.,” which takes a more chilled-out approach to putting a fist up in the air and which also briefly extolls the benefit of giving to charity.
As he sings,
“See, 'cause Mr., when you're rattling on heaven's gate/By then it is too late/'Cause Mr., when you get there, they don't ask what you saved/All they'll wanna know, Mr., is what you gave.
So excuse me Mr., but I'm a Mr. too/And you're giving Mr. a bad name, Mr. like you/So I’m taking the Mr. from out in front of your name/ ‘Cause it's the Mr. like you that puts the rest of us to shame.”
Some of the best live shows I saw in college were with Ben Harper and his band The Innocent Criminals. Also, take note in the live video below of bassist Juan Nelson, who I met after a show once in the early 2000s. He was a jovial character and one heck of a bass player (sadly, he died in 2021).
I loved Harper’s playing and the way he performs live. I was never wild about his lyrics—I thought they were a little too simplistic—but I never thought about it from this perspective until reading this piece on dropd.com in which Harper talked about why some of his work isn’t meant to be complex.
As the author wrote:
“Harper's beliefs are deeply entrenched in his music. The roots of social and political comment percolate over the sparse melodies. What separates Harper from countless other singer/songwriters is an emotional intensity and a lyrical intelligence that speak directly to the heart without any excess baggage. The stark images and concise writing harken back to the ghosts of Bob Marley and Hank Williams Sr. The literary teeth of such songs as ‘Oppression,’ ‘God Fearing Man,’ and ‘Excuse Me Mr.’ bear witness to modern day injustices and evils, yet follow in the footsteps of gospel and dust bowl folk with their universal messages.
“‘I grew up listening to spiritual music, Blind Willie Johnson and folk,’ [Harper said]. ‘Folk is bare bones music. You can't be too clever with it because it's the people's music. It's the blood in the veins of the common man.’”
More information here:
Every Money Song of the Week Ever Published
Tweet of the Week
I’m not sure whether this tweet is saying that those in the financial industry are paid less than we assume or just that they’re really practical with their automobile purchases, but it’s interesting nonetheless. No Lambos or Ferraris anywhere in sight, which speaks to WCI’s philosophy of getting rich by driving a cheaper car.
So this unnamed financial services company I work for has an automobile purchasing program and lists the top purchased models by employees in 2023, no surprise it reads like a @JLCollinsNH post.
Honda CR-V
Mazda CX-5
Toyota RAV4
Honda Civic— William Knowles (@c4i) December 27, 2023
How have you handled large windfalls or rollovers? Would you rather lump sum invest it or DCA it? Does the stock market at all-time highs give you pause?
[EDITOR'S NOTE: For comments, complaints, suggestions, or plaudits, email Josh Katzowitz at [email protected].]
For most psychologically DCA is prudent and “My Guy” Nick Murray is a believer in dollar cost averaging
I should DCA since I do better with that emotionally, especially with someone in the column noting a recession is predicted for 2024, but I have a further quandary. I’m over 60 not under 50 and just adjusting our portfolio in the past decade from 95% stocks to 25%.
I therefore did not immediately convert a rollover from TSP to a Vanguard traditional IRA last year into stock mutual funds, for two reasons: 1- maybe this amount should no longer be in stocks anyway, and 2- at the moment the “cash’ mutual fund the money is in earns 5% or so (day by day- might be 1% again in a few months).
1: I think we might pass our Roth IRAs on to our kids in the next 40 years or less, and whether they or we cash it out in 15 (hopefully even more) years or 40, it is better in stocks until then per our longer term planning- if anything perhaps I should buy stock funds inside the IRAs before or after converting but sell them in our taxable portfolio, however then paying both capital gains AND regular income tax on the amount in the same year (wouldn’t the kids rather get our mutual funds stepped up from the value 30-50 years ago?). Only the conversion could increase our marginal tax rate though.
2: I think the answer is I will DCA inside the traditional IRA since a drop in the cash rate is likely to coincide with a hike in purchase price for stocks anyway aside from the likely continued upward trend- even a 2024 recession is unlikely to lower stock prices all year. And stick to keeping our 25% non stock funds in and derived from our taxable accounts until our more eminent demise (when the kids might prefer we leave them more money in stocks with large cap gains we will both avoid being taxed on) or our need for money change the picture. As our plan is die with zero, we will be giving them cash if we feel we can afford it along the way- they can buy their own stocks with that if they wish.
I recently read something that I think might be an interesting way to think about how to invest your monies. It feels like you made a drastic change from a very high percentage of stocks to something that might be too conservative. Regardless of your age and the size of your portfolio, there are assets that you will need in the next 5 years. Take that amount and invest it conservatively, whatever makes you comfortable. There are assets that you need in the next 5-10 years, take that amount and invest it more moderately. The assets that you need more than 10 years from now one can invest more aggressively. This bucket mentality, should help you think about not just your total portfolio, but how parts of it are working for different purposes.
Under present circumstances, where the cash could sit in a Federal money market fund earning >5%, does that impact lump sum vs spreading out a bit through DCA given that uninvested funds could still generate a decent rate of return at low-to-no risk.
I’m also curious to see how lump sum in December vs DCA showed one vs the other to be ahead since 2000-present. I don’t think we’re quite at the same place today as 2008???
Thanks as always for your interesting and thought-provoking articles!
It certainly hurts less! I definitely worry less about having uninvested cash sit around for a few extra weeks as discussed here:
https://www.whitecoatinvestor.com/the-benefits-of-high-rates-on-cash/
My experience with this one suggests the best answer for you will have more to do with your personal financial condition at the time of investment than it does which approach works out best in terms of eventual returns. For us, debt elimination and a big pile of non-retirement cash (held as MMDAs, T-Bills, VFMXX) way past usual notions of an emergency fund helped make a big lump purchase into a 60-40 index portfolio. It provides the ultimate back brace for times like 2022, and hopefully those other times like 2008. This allows thinking about it as buying intangible investment property rather than as a dollar valued cash equivalent based on their current values, which I think is key to being able to “stay the course.” Bill Bernstein has some great writing on this, and I think he covers it in his Bogleheads video discussions. Will always be thankful for his (and the Dahles!) generosity with time for sidebars at the conference to work issues like this.
r.e., “ The stock market hit an all-time high in December 2023, blasting through the 37,000 mark for the first time ever, and it has stayed in that general vicinity ever since. ”. Pet Peeve: This refers to the Dow Jones, which is hardly “The Stock Market”. The Dow Jones is an index of only THIRTY companies !
Pet peeve appreciated as this issue pops up routinely on the daily news and such.
Not sure what index represents the “Market” these days. It used to be that the S&P was diversified and represented the broad market relatively well. In recent years, the top 10 stocks of S&P (mostly tech) weigh more than the bottom 400. If the top 5 have a bad day, the index can be flat or even negative despite a decent day for the remainder of the sectors. As the top 10 are tech focused, S&P ~ NASDAQ. What Dow still does well is represent the broad market/sectors in a weighted fashion.
One pertinence of this is recognizing what is sold as an S&P index fund. It is no longer as diversified.
I’m not even a huge fan of the S&P 500 for the same reason.
I am a radiologist, a new reader on the website, and I am enjoying the content thus far. I can see that Jim believes that you make a financial plan and stick to it. This is solid advice, but this question really has two parts.
Regarding the DCA, dropping the $150K in at one time probably makes the most sense, and won’t make a significant difference to when your retirement date comes around. I think there is a technique that can help those with emotional misgivings about moving a significant sum of money that wasn’t discussed. Instead of averaging over months or a full year, which will affect your “time in market,” assuming your investment plan has substantial amounts of risky assets, you can add the money into the account in smaller chunks on consecutive days. The market typically moves around 0.7% daily, on average, so if you worry you are picking a “bad” day to invest, simply divide the sum into chunks of $30K-$50K each, in this instance, and invest the smaller amounts, the same way, over several days. Then you typically get some up and down days. The market moves up 54% of days and you will be invested sooner rather than later.
I do think investing at market top deserves a bit more discussion. While true that market tops occur quite frequently, I can understand concern about the current market top. I tend to use SP500 as a market proxy, and I firmly believe that valuation matters. The price to earnings ratio, while not a good indicator of market direction in the short term, does suggest the market is currently “overbought” or expensive. At the risk of devolving into a market timing discussion, which at some level is what I am discussing, the SP500 is “overbought” more than one standard deviation above historical averages (but less than the about 2 standard deviations it was overbought when we were in the SP500 4800 territory in early 2022). My two cents…,and I realize this maybe runs a little contrary to Jim’s set it and forget it philosophy…if you are considering adding a significant sum to a portfolio soon, this might be a good time to make a minor adjustment downward on one’s risk profile. I am not advocating, a significant change in plan, just a slight acknowledgment that things might be expensive. Historically stock returns in far overbought territory are reduced to around what bonds typically return over time.
One last point. Cash is earning 5%, so indecision isn’t such a disaster.
Hmmmm….logging into my investment accounts every day for many days in hopes of buying at 0.7% less when I am at least as likely to buy at 0.7% more….seems a bad use of my time.
As far as valuations being a reliable way to time the market and this time being different, you pretty much could have said that about 90% of the time since 2010. In my experience the people who are unwilling to buy at the top because “the market is overheated” are the same people unwilling to buy at the bottom because they fear it has further to fall.
If you could reliably time the market, why would you only do it with your money? You should be doing it with all our money and all the money that all of us can borrow and charging 2 and 10 to do it.
Dropping orders on consecutive days is a useful technique to overcome the fear of moving significant money into the market, by breaking it into less large chunks. The money should be invested. If you want to help investors control their finances, please don’t pretend it is difficult and time consuming to drop market trades. Two or three minutes, well spent. Investing over 1 day versus 3 days won’t make a difference in the end.
In 2010-2011 the SP500 PE ratio was 16 (average). The SP500 PE ratio is now mid 20s. In 2010 I had more risk assets in my account. I have a bit less now. My style of assets and the sector biases have also changed.
Investors will do well to aim for market average returns for low fees by using mutual funds or ETFs with no loads. “Time in the market” not “timing the market.”
I agree there is little difference which is why it is bizarre to me that it would somehow make it easier for somebody. If that logic is hard to get/follow/use, then how is that person going to avoid selling at market lows? I would submit their AA is too aggressive if lump summing is hard. IF it’s hard to lump sum 80/20, try 20/80. Easy now? Okay, what about 40/60?
The article was about investing a windfall. I can appreciate that for some people moving a significant sum of money can be difficult if they haven’t done it previously. I used to worry about moving tens or hundred of thousands of dollars at a time when I was routinely putting a few thousand dollars per month into my retirement accounts, even if I had a financial plan with which I was comfortable. I’m clearly not a psychologist, but you probably are onto something with what is actually causing the underlying concern. (Hopefully they are buying at the market lows.)
WCI and I had the exact (helpful) exchange in the comments for TLH and I was (am) one of those people with a large windfall and used the emotional crutch of breaking it out over several weeks.
What is not addressed often is that a large windfall can make you re-assess your financial plan and allocation. People, situations evolve. In my case, it was over 2-3X my net worth. These scenarios open up a lot of opportunities. It can be difficult to develop/commit/execute on a new financial plan as you grow into it and learn more about other opportunities. Some DCA/perioding investing can help keep some of your money into the market while keeping options open (i.e. more real estate?, private equity/credit?, other alternatives etc.) Because if you lump sum the whole thing, and you decide you want to invest in other asset classes a few months/a year down the line, you’d have to sell and pay all the cap gains (more probable, as cited above).
For now, I still have a huge chunk on the sidelines in cash earning 5%+ but anguished about eventual re-investment risk when rates go down. But if I’m honest, I do enjoy the benefit of keeping a lot of options open, though I know I can’t stay undecided for too long.
Yes, if you don’t have a plan in place yet, it makes sense to sit in cash. But once you have the plan set, lump sum into it.
There are worse things than making 5%+ on your cash while struggling with indecision. I feel much less urgency these days to get cash into the market.
The whole discussion would be much more clear if the terminology were more clear. The problem with the term Dollar Cost Average (DCA) is that it gets used two ways. I try to distinguish between those two ways by using the term periodic investing to describe what most people do as they go through life–invest when they have the money. Over time, that causes them to buy shares at many different prices which is “dollar cost averaging.” But those folks really don’t have a choice to lump sum or DCA because they don’t ever have a big lump sum. Only in a situation like yours with a large windfall is there really a decision to make. I mean, I guess every month someone could DCA in their monthly contribution over multiple days or weeks, but at a certain point it just gets dumb and you’re introducing hassle and complexity for no reason.
I’ve seen the bears on CNBC complaining the market is overbought since like 2015. Imagine if you followed their advice and sat out the stock market around that time.
Please don’t misunderstand my point. My point being, market data should also inform your investment decisions. The markets are often near their top, but not every market top is the same. In 2015, the SP500 PE ratio was 20ish, a smidge above long term average, probably average for the last 30 years. In December 2021, the SP500 PE ratio was over 35, more than 2 standard deviations above norms, and higher than any point in the history of the market except 2007. Interestingly, the market “only” went down to the 20 PE ratio range that year, similar to your 2015 example. From December 2022 to December 2023, the markets moved significantly upwards (around 25% SP500) almost exclusively on price. Earnings are barely changed. The market is therefore “hot”, not on a gut feeling, or because it’s Tuesday, but because the PE ratio is climbing and it is elevated. Said differently, the earnings yield is low. This doesn’t help anyone know what the markets will bring tomorrow. I don’t ever recommend sitting on the sidelines in cash. To me it means that stock investments in general are likely to perform less well going forward than they historically have over an extended period of time. This year…not sure. Next year…don”t know. I am underweight stocks.
It sounds smart to say market data should inform your decisions. But it breaks down when you try to actually implement it. What exactly are you going to do when the PE is 15 or 20 or 25 and is that going to do better than just buying and holding? I knew one investor who got out of the market in the mid 90s due to valuations and never got back in because they never came back down to where he thought they should be. He missed out on almost 30 years of market returns.
Whatever your “valuations” plan is, write it down and stick with it. Those who try to do this by feel generally fail. The investor matters more than the investment.
If the guy has been out of the market for almost three decades, should we even call him an investor?
My recollection is he invested mostly in cash, I bonds and things like that. He just wasn’t a stock investor.
“If it smells like market timing and walks like market timing, well then . . . it’s market timing.”
Agree with the general concept if you are using this phrase to describe the trading in and out of markets using some crystal ball. Yet this phrase does not apply to the question at hand. I did not see a mention of using the $150K for frequent trading. Not buying when the market is too hot is NOT market timing. Buying aggressively when the market is getting crushed and then holding is NOT market timing. Market timing should be contrasted with buying and holding.
Warren Buffet’s BRK is sitting on $160B in cash/treasuries at end of 2023. Is Warren disregarding his own misgiving about market timing? No! BRK is awaiting the irrational exuberance of the overbought market to cool down before nibbling on high value securities again. If there is recession in 2024, certainly Warren will be out on a shopping spree.
Over the longer horizon, best overall advice here sounds like there is no single best answer. The right answer is the one that allows the investor a good night sleep today. Here, lump sum has won.
Why wouldn’t it apply? I disagree with you. DCAing is marketing timing with some of your investment.
If we all could tell when the market was “too hot” (i.e. about to go down) we wouldn’t DCA into it. We’d borrow all the money we could find and short it. It’s because we don’t know what the market is going to do that makes this an interesting question. Since the market usually goes up, lump summing is the right thing to do. If you knew the market was going to go down, you wouldn’t invest at all or you’d short it. If you’re super worried it’ll go down and you’ll feel bad and sell low or something, then DCAing as a mental crutch can make sense. But I tell people if they’re not comfortable lump summing into their chosen asset allocation, their allocation is probably too aggressive. Dial it back until you’re chomping at the bit to get your money invested because your FOMO is outweighing your fear of loss.
BRK holds cash for a different reason and at any rate, you’re not Warren Buffett nor BRK so why would you feel like you need to invest like him/it?
If you know the market is overbought I assume you’ve shorted it or at least sold all your stocks, right? No? Then you must not be very sure. Welcome to the club.
We agree! I certainly am not Warren Buffet! I am much younger than him and I don’t like McDs breakfasts. Aside from that, why would I not emulate the OG of “market” investing? He has ridden the US markets for decades like a State Fair pony. Once you see something good, you emulate it. That is what we all do. Anyone here or anywhere with a novel investment concept and not emulating someone else, speak up.
By asking why I don’t sell when the market is overbought, you helped my argument. I don’t sell because I buy on low and then HOLD. A market timer will buy and sell and buy and sell until bankruptcy. I see values and I don’t guess trends. I get rid of appreciated stocks only when donating them or selling them to pounce on another sale. Very rarely (twice) the fundamentals of a stock went terribly bad, and I sold. Often this implies that there was inadequate due diligence on my part in purchasing.
Another principle we agree on is that I don’t know where the hake the “market” is going. However, as a value investor, I sure do sense the earliest signs of irrational investors’ anxiety and upcoming sell offs offering me a once in a decade opportunity. These moments are many and come every year and are not as rate as 2008 and 2020. There are 30 – 50% sales today!
I will leave the DCA alone as random timing of market entry appears far from market timing.
Your comment that the “market” usually goes up is very true for the aggregate. The fact is, there are several markets within the “market” and seeking these value sectors is where I would have directed the hypothetical $150K. Not to the overbought broad market. As the “market” is at peak based on indices, what is not apparent today is that several household stocks in the telecom, pharma and mid-range bank sectors are at 30 – 50% on sale. I will take my chances on the fire sale stocks.
If you have to call this buy on a sale and hold approach market timing, I certainly won’t be able to talk you out of it irrespective of the facts.
Have you ever bought a lottery ticket when the jackpot is very high? This behavior may actually make sense. The price of the ticket is the same as always. Your very, very, very low chances of winning life changing money are the same as always. But, the discounted net present value of the ticket could exceed the price to buy the ticket. It’s possible to calculate knowing about how many tickets have sold (so that you can calculate the chances of multiple jackpot winners).
A pretty good litmus test to determine if a person may be subconsciously prone to market timing is if they can be heard using terms like the market is “too hot” or curiosity/speculation about when it many “cool down”.
“Too hot” relative to what? Yesterday, last week, last month, August 6th 1994, your 3rd wedding anniversary, the day Tom Brady retired for the first time, Margaret Thatcher’s birthday?
The term “too hot” implies a relative measure of something deemed “just right”. Jim’s graph shows that the market is almost always “too hot” by any retroactive relative perspective and waiting for the “just right” moment can only be known in hindsight. This Goldilocks relativism is always arbitrary, and acting on arbitrary data will produce arbitrary results.
If it smells like market timing and walks like market timing…..well then, it’s market timing.
That being said, I wholeheartedly endorse your overall conclusion – “The right answer is the one that allows the investor a good night sleep today.”
This is a very personal choice, one with arguably inconsequential long term impacts. Whether the $150k gets in the market today or over the next 12 months doesn’t matter remotely as much as making sure the $150k gets invested rather than spent on a NetJets membership.
Ha ha. Like there is a $150K NetJets membership. 🙂
“Too hot” relative to it’s own average valuation. If you want to blindly always invest exactly the same way, reducing risk slowly as we age, that should yield average results (which is a good thing). If you want to understand why some sectors might perform better than others, why some styles might be more in favor, which international markets have different investing environments, I think that is always a fair thing to assess. The purpose of this blog is to enable professionals to comfortably control their finances. An easy portfolio is completely fine. If you want to use a bit more finesse, my suggestion is to invest 90% of your portfolio in the easy manner to get started, then take 5-10% of your portfolio and try to manage it actively. It is a great way to learn about finance, and some might find it a fun learning experience. When the SP500 was at 4800 two years ago, there is money to be made in the 20 percent drop and the 20 percent gain round trip, by increasing risk as valuation decreases (buying low). The SP500 was overbought this entire time, in my opinion, it was just less overbought at 4200. Set targets. Add risk when valuations are less elevated. Reduce risk, when markets are “hot,” as they are now. Not extremely hot, let’s say “warm.” There is much to know and we physicians can learn it too. You don’t need to pay 2 and 10. For the same reason that you don’t want to spend 1% to earn say 7% after inflation in the market, because it is really 14% of earnings to pay a professional advisor, active investing has the potential to maybe get you slightly better returns. My experience is less than 1% better than average, but it was fun to learn along the way. Maybe I’m lucky, but I don’t think it’s timing to assess market fundamentals.
I do have an aside on this comment. If you are more than 10 years from your retirement, you should probably just blindly invest largely in stocks. There is plenty of time to ride out the market fluctuations. Hold a little bit of income investments, say bonds, just to learn about it. As 2020 taught people, bonds have risk too.
1% better after after taxes and the value of your time? If so, you should be managing money for others.
Thank you. I have heard that before. I happen to enjoy being a physician and helping others learn “finance.”
Just make sure it’s true. Many “outperforming doctor investors” don’t actually know how to calculate a return, don’t include the tax costs of their investing method, nor include anything to represent the value of their time. I mean, I can increase the return on an investment property by managing it myself, but not if I include the value of my time.
Also keep in mind that outperformance may be luck, especially over shorter time period. That would be a big tragedy to assume you had the ability to beat the market, convince your family and friends to invest with you, and then turn out to have just been lucky. I don’t know how many years it takes to statistically prove a manager has skill, but it’s probably most of a career.
I enjoy the way you think about these things. Could I earn more money moonlighting in my physician role than the outperformance the top three brokerage firm calculates? Not a chance, based on the time spent recently, but that is only true thanks to the power of many years of compound earnings. Had you asked me that question 10 years ago, when my portfolio was on 45 year old physician autopilot, just after the lost decade of stocks from 1999-2009, I’m less sure. I would say that I am glad that I have spent the time and energy along the way learning good investment principles. I do wonder why you had the bias in your blog portfolio last year on small cap value and, to some degree, real estate? In the rising interest rate environment of 2023, small caps don’t make great sense to me since they don’t tend to have strong balance sheets, so will have growing borrowing costs. There likely is a blog on this somewhere, but how often do you adjust your portfolio style (not just rebalance)?
I don’t adjust my portfolio style. I know that each asset class will have its day in the sun, but I’ve discovered I’m not particularly talented at predicting when that will be. Perhaps you’re better at that than I am, but I suspect like most you’re just a little overconfident on that point. It’s harder than it looks to predict the future. Try it. Keep a journal of your predictions and look back at them after 1, 2, 5 years. I didn’t have to do that for long before I lost confidence in my ability to do it.
What does “overbought” really even mean? I assume it generally means the current P/E is too high but where is the ideal P/E written in stone? It is not some fundamental physical property like gravity. I understand what the historical P/E has been, but isn’t it funny that everyone always repeats the mantra “past performance is no indication of future performance”, yet they take a P/E of 16-18 as gospel that shall not be violated? I don’t buy it. To me, it makes sense that as investing becomes easier to do (cheap index funds, no commission or trade fees, fractional shares) that more people invest, and thus the P/E raises for no other reason than more people are now buying into the stock market. That doesn’t indicate to me that a p/e of 20 means a crash is imminent. Perhaps a P/e of 18-20 is the new normal in an environment where more people are investing than ever. Anyways, just my take.
I agree that the PE ratio averages have risen for partly that reason. The PE ratio of the indices have also risen due to the enormous weighting of the growth stocks in the indices at the moment (think SP493). Should inflation affect PE ratios? I also think markets swing and that there is momentum so things are displaced at times. I don’t believe the all knowing market is always instantly priced to perfection. I was not surprised and I was appropriately positioned when the market tanked in 2022, because those valuations were extreme by almost any metric. Picking reentry points is not easy. The outperformance that year alone will forgive a decade of dabbling for minor return improvements! I also don’t believe that the displacements are typically huge at any given moment, so I appreciate Jim’s take that the time a physician takes to try to find those crumbs may not be worth it. I’m not clear that just picking a portfolio skewed to a certain style and sector bias and DCAing away is an appropriate portfolio for me though. Different styles and different sectors have historical outperformed in different market environments. Are they guaranteed to act the same way this time…of course not! There are style pickers and sector pickers that historically outperform the overall index over long periods of time though, so it is interesting to think about these nuances.
There are far fewer successful “style and sector pickers”, much less stock pickers than there should be from pure chance alone. Imagine 10,000 people in a stadium flipping coins. After ten flips, there will still be some who have flipped heads every time. That doesn’t mean they’re skilled.
One can also think of PE ratio in terms of the earning yield (the inverse of the PE ratio), which is only 3.9% (SP500) and shrinking. (Please don’t confuse this with the dividend yield, which is 1.44%.) Of the 3.9% net profit, companies only pay a fraction of that amount in dividends. In other words, $185 in earnings per share of SP500 on a price of $4750ish. These 500 companies are earning 3.9 cents annually per dollar of investment. When we lived in a zero interest rate environment these “lower” earnings yields (or higher PE ratios) made more sense to me. Things feel displaced if cash can earn more than 5%. A PE ratio of 16-18 would be an earnings yield of 5.56-6.25%.
Hmmm, “too hot” based on what?
Based on the “Intrinsic Value” of the stock! I assume you know what I am about to detail but for other readers’ sake, let me.
Each stock on the market has an actual worth that is determined by its share price, 12-months earning and the forward 2 – 5 years earning growth rate for the company – all publicly available info! The price you see look up today is NOT the “intrinsic value”. There is even a simple formula that is a product of these factors. Well, that product is the “just right” price. Below just right, it is on sale. 50% down, fire sale. Above it, “too hot”.
This actual value of a stock will be simpler that checking the “made up” prices in 1994 or trying to remember your wedding anniversary 🙂
You appear to see the “market” as opaque and as unpredictable as earthquakes and tornadoes. Hence untamable. Not so.
About anytime, there is a sale going on in the “market” due to frequent panic sell offs (thanks to liberalization of trading) that are very common nowadays. Today (not in retrospect), 30 – 50% sales are available (compared to intrinsic value) in several large sectors of the economy while the “market” indices are peaking. No Goldilocks relativism or crystal ball needed here. You take your cash and seek the unexpected fire sale – as fire sales often are.
Like META getting on 75% sale for months in Fall – Winter 2022. Did we need an MBA to tell us that a company earning $10/share and selling for $90 was a fire sale? Nah!!! Do I need to have predicted this 4-month sale? Nah!!! Yet I oblige when opportunity knocks on my door insistently. It would have been rude not to oblige.
Finally some sanity. Thank you! Markets move when companies report earnings for a reason.
You could also model the fair value of the sp500, with earnings of 185, assuming earning and dividends grow similar to GDP and a reasonable investor would need 6.5% returns and thereby divine the market is “hot”.
I’m sorry, that’s entirely too simplistic. The price of a stock can remain above what a simple formula like this says it is for decades or even years. If it was obvious what the true value of a given share is, then nobody would ever pay more than that.
The market price is the consensus price of the value of a company at any given moment incorporating all known information about the company. The likelihood of your opinion of the value of a company (even using a formula) being more accurate than the combined opinion of thousands/millions is extremely low.
Take your idea to its logical conclusion. If one could just assess the value of each stock using your formula, it would be easy to beat the market. Yet almost no one seems to be able to do it reliably over the long term.
The proof is in the pudding. You should be a billionaire (or at least well on your way there) if your ability to assess the value of a given stock is better than that of the overall market. Heck, you should be managing money for the rest of us. I”m guessing you’re not though because like the rest of us, you’re not smarter than the market.
Good luck with your stock picking. Be sure to do an ongoing comparison to what you would have earned just buying all the stocks (i.e. an index fund) and include taxes and the value of your time. If you’re like most of us, after a few years you’ll realize you’re not as good at this as you thought you were and you might even suck at it.
“Just Keep Buying” by Nick Maggiulli has a section on this. He does a historical analysis and just like Jim Dahle, comes to the conclusion you’re better off investing as soon as you can, and not waiting. If you wait to slowly invest a windfall, you are more than likely losing money in the longer term. Follow the stats, not the emotion.
Those analyses have been done dozens of times. Anyone who argues for anything else cannot do so on the basis of logic, they can only do so arguing on the basis of behavior. I just think it’s smarter to dial back the AA instead of DCAing into a more aggressive one. The DCA period will eventually end and I’m not sure tricking yourself into a more aggressive AA than you can really handle emotionally is a smart move.
At VOO 475/share I invested my divorce settlement from a TSP that accedneally ssat in the Money market Acount from Oct till now. I just lump summed it into the marks with no cushion from the run up this year and now I am watching it being eaten away regretting not following my original plan to DCA for the next 7 months. Now I am wondering do I pull it fearing lossing it. Post divorce I don’t feel level headed and feel like every decisions is a bad one. I see the right direct then just take the wrong one. My question: stay steady or pull it at a $20,000 lost and go back to my original plan of DCA? – Help
I’m sorry you’re going through that, Rhonda. At this point, I’d just leave it in VOO and maybe stop looking at your TSP account for a while. Read this and stay the course. https://www.whitecoatinvestor.com/why-staying-the-course-is-hard/
Thank you for your help. Because my ex-husband was the military member (and physician) who by no fault of my own, and his own discovery, needed to make a different life choice change in significant other, I was left under and with the 20/20/20 military plan, previous investments in the IRA and ROTH that stayed steady as was and is and yearly maxed out depending on income as to which one, and a 50% potion of the TSP that I was force/required to roll out and over out of the TSP account into a IRA/ROTH since I was the non-military member and not allowed to leave it in the TSP. Under divorce brain fog and shock (etc), although I had successfully rolled it, in January I realized I didn’t roll it all of the way into the S & P 500/Total under Vanguard and it ending up in a holding pattern within the Money Market account at 5.2%. while missing the October run up (and the share prices of $388) I was so excited to see with timing and thought good fortune among a not so great situation. i.e. divorce. A red tag sale from my perspective.
It is solely the TSP portion that I have made errors with. Which is about 1/3 of my retirement portfolio. Yes, I did earn the 5.2% thank goodness for what could have been a worse error, but lost out on the run up in the S & P 500 from October – March.
In January I saw that the second step from the money market account to the VOO didn’t happen so I waited watching knowing the market was near teetering (looking back I should have just put it in). Values over priced, etc. But a week before the market dropped April 8th, I put the money in anyway. Out of character for me and on a whim. A moment of just wanting to get the chore off my mind and move on with life and away for it and the process to cleaning up the repercussion and residue of the divorce out of my mind. Obviously an emotional decision and big no no. As a result, the base of that money has dropped with no previous cushion of a run up and a huge disappointment that I didn’t wait just a little longer for the sale. One more week. I have watched $25,000 disappear from the previous TSP lump sum instead of my original strategy of dollar cost averaging it in as I had intended through Sept – Oct of 2024 anticipating a drop in the market. I suspect another $25,000 or so loss coming (may a bounce then to that). Not to give anyone bad luck with that comment.
The drop in all of the money that has been in the market with a run up cushion has not bothered me at all. It is just this money that was put is as a base, no run up history, and no sale I was hoping and waiting for.
So with all of that said, and obviously no crystal ball, 😉 Your objective advice (unofficial non-advice) is to still stay the course. Leave it alone and not pull it at a $20,000 loss and then readdress it back to dollar cost averaging riding the market downwards. My guess it I hit the wrong side of the 1/3 of the 2/3’s that lump sum out performs DCA at this point. The VOO share price was bought at 475.
Mostly I am frustrated at myself for missing the sale I was waiting for. I do automatic monthly dollar cost average 25% of my income anyway into the S & P 500 as it comes in so that side of things is still happening. It is just not with the “large” amount that I had to get back into the market.
So, to with redundancy likely on your part, your best advice it to still stay the course and leave it alone? Same as this article about Lump Sum?
Thank you once again for your help and for the education you se t forth for physicians and spouses of physicians (no ex on my end). If I could call Warren Buffet and ask him without feeling like I would be intrusive, I would ask him. 😉
Read the article – Thank you – Very helpful
I’d follow Jack Bogle’s advice on this one:
You didn’t invest this money for 1 week or 3 years. This is money you’ll spend in 10, 20, 30, 40+ years. I’d feel VERY confident it will have recovered $20K and more by then. If you pull it and the market goes up what will you do then? Regret it, right? Stop watching what the market is doing in the short term. It just doesn’t matter to your goals.
I am abundently appreciative for your input. Thank you.