Lump Sum vs DCA

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gdogg
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Lump Sum vs DCA

Post by gdogg »

Just wondering what you all think regarding lump sum investing vs. dollar cost averaging in this situation.

My RRSP and TFSA (low six figures) are flush with cash (20%) as I sold off some individual stocks over the past couple of months. The plan is to replace them with a few ETFs to make my portfolio less volatile. I'm trying to weigh the choices of:
1. Buying all the ETFs now in a lump sum
2. Dividing the cash into a number of payments (say, over the next couple of years). Then making those smaller purchases monthly or bimonthly.

I'm with Questrade so there are no fees to buy ETFs. I don't plan to retire for 20+ years.

The issues with option 1 is that markets are quite high right now, and who knows where they might go with political volatility. However I could reason that the gains I made with the sold off stocks are already factored in, even if purchases I make now were to drop a bit.

The issues with option 2 are, what if I miss out on a big rally and end up paying more in the future? Not that I think I can time the market or anything.

Thanks everyone!
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AltaRed
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Re: Lump Sum vs DCA

Post by AltaRed »

There are many threads in FWF talking about Lump Sum vs DCA, many acedemic articles analyzing same, and sites like finiki that discuss the same thing. The general consensus is that 'time in the market' provides a better long time return than 'timing the market'. That means buying when you have the funds to invest is, on average, better than doing otherwise. The biggest issue is 'buyer's regret' in those instances where your timing is off and you buy just before a market correction.

However, that is not your situation. You already 'lump sum' sold some investments in the past few months. Why would you not immediately re-invest those funds in the market to stay invested? Time out of the market is more likely to hurt you than help you, i.e. markets go up more often than they go down. You are really betting on timing the market. Stay invested!
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Re: Lump Sum vs DCA

Post by StuBee »

I am 100% in agreement with Altared. When I sell, I buy (if it is not spent...). A minor compromise would be to DCA over a "short period". I will let you define "short period" :).
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Re: Lump Sum vs DCA

Post by DavidR »

AltaRed wrote: The biggest issue is 'buyer's regret' in those instances where your timing is off and you buy just before a market correction.
And the second biggest regret may be not buying and the market goes up.

So gdogg, which will upset you the most? Money 'lost' by market going down just after you buy, or money 'lost' by market going up before you buy? Some will minimize their potential regret by putting half in now, and half in later...
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Re: Lump Sum vs DCA

Post by gdogg »

Thanks AltaRed and StuBee!
DavidR wrote:
AltaRed wrote: The biggest issue is 'buyer's regret' in those instances where your timing is off and you buy just before a market correction.
And the second biggest regret may be not buying and the market goes up.

So gdogg, which will upset you the most? Money 'lost' by market going down just after you buy, or money 'lost' by market going up before you buy? Some will minimize their potential regret by putting half in now, and half in later...
DavidR, I think that "Money 'lost' by market going down just after you buy" would be my bigger disappointment, but I suppose that is minimized since I cashed in on some gains already by selling my stocks.
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Re: Lump Sum vs DCA

Post by StuBee »

If your gains in individual stocks have been significant, do not imagine that the purchase (as in "buy and hold") of ETF's with their lesser volatility will be in any way consoling. Do not be surprised to experience "sellers regret" as you watch some of your sales continue to outperform your replacements.

I have trimmed my ENB twice... I have regretted trimming my ENB twice... I feel as if it's replacements have not done as well (I do not know this for sure and I will not torture myself by attempting to find out...). However, I do sleep better at night since I now consider it's relative weight in my portfolio as being more reasonable.
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Re: Lump Sum vs DCA

Post by pmj »

Visualize if you had not sold, and those investments were to drop by exactly the same amount as your new investments might drop. The end result is identical. Does the sell & buy outcome bother you more than the holding outcome?
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Re: Lump Sum vs DCA

Post by StuBee »

pmj wrote:Visualize if you had not sold, and those investments were to drop by exactly the same amount as your new investments might drop. The end result is identical. Does the sell & buy outcome bother you more than the holding outcome?
I believe you are saying "either keep A or change A for B with both scenarios having identical market outcomes". I would be more than happy with this scenario.

But, what I am saying is that I have reason to believe that the hold scenario in reality would have provided a better market outcome being now a few years down the road from the decision. Nonetheless, I am content and I have diversified away from an overly concentrated position in ENB.

Now I have to start worrying about RY... 11% of total portfolio and climbing... :wink:
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Re: Lump Sum vs DCA

Post by 2of3aintbad »

StuBee wrote:
pmj wrote:Visualize if you had not sold, and those investments were to drop by exactly the same amount as your new investments might drop. The end result is identical. Does the sell & buy outcome bother you more than the holding outcome?
I believe you are saying "either keep A or change A for B with both scenarios having identical market outcomes". I would be more than happy with this scenario.

But, what I am saying is that I have reason to believe that the hold scenario in reality would have provided a better market outcome being now a few years down the road from the decision. Nonetheless, I am content and I have diversified away from an overly concentrated position in ENB.

Now I have to start worrying about RY... 11% of total portfolio and climbing... :wink:
No need to worry, just have a criteria to sell some. If you look at the chart for RY.to, it was making new highs almost every day and RSI was over 80. When it got to $99.90, but didn't break through that nice round number, that was another signal.
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Re: Lump Sum vs DCA

Post by StuBee »

2of3aintbad wrote:No need to worry, just have a criteria to sell some. If you look at the chart for RY.to, it was making new highs almost every day and RSI was over 80. When it got to $99.90, but didn't break through that nice round number, that was another signal.
I quite agree with your first sentence. As for the remainder... different strokes for different folks...
I will sell if and when I consider it to be "too big". (My ACB is about 10$/share...)
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Re: Lump Sum vs DCA

Post by cardhu »

My thoughts are mirrored in some of the other responses, but to summarize …
1. I associate DCA with deploying “new money” ... when you switch from one equity to another, even if you have a gap between transaction dates, you are not deploying “new money” ... therefore, I would not consider this a DCA situation at all.
2. Even when you are deploying “new money”, DCA does not offer any financial benefit, whatsoever ... it only offers emotional/psychological benefit ... you can see this in the discussion surrounding “regrets” or “disappointment” ... DCA is an exercise in managing potential regrets ... it has nothing to do with financial strategy.
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Re: Lump Sum vs DCA

Post by longinvest »

I do not believe in my ability to appropriately change my asset allocation based on the state of the markets I invest into (what is called a tactical asset allocation) to avoid losing money or maximize my gains. As a consequence, I picked an asset allocation that I can live with regardless of the state of these markets (what is called a strategic asset allocation).

The idea of keeping a big sum of money in cash and then deploying it gradually through small investments (DCA), because of worries about the state of some markets I invest into, would indicate that my strategic asset allocation has become inappropriate, because it would mean that I have stopped being able to live with it regardless of the state of the markets I invest into. If this happened to me, I would reconsider my strategic asset allocation, which kind of makes sense when one's financial situation changes (maybe one has more money than when the asset allocation was chosen and, as a consequence, one has reduced his appetite for risk in the hope higher returns).
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AltaRed
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Re: Lump Sum vs DCA

Post by AltaRed »

cardhu wrote:I associate DCA with deploying “new money” ... when you switch from one equity to another, even if you have a gap between transaction dates, you are not deploying “new money” ... therefore, I would not consider this a DCA situation at all.
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Re: Lump Sum vs DCA

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cardhu wrote: ...Even when you are deploying “new money”, DCA does not offer any financial benefit, whatsoever ... it only offers emotional/psychological benefit ... you can see this in the discussion surrounding “regrets” or “disappointment” ... DCA is an exercise in managing potential regrets ... it has nothing to do with financial strategy.
I never quite thought of it so clearly before, but it makes sense. If you think the markets are fairly valued, invest a lump sum right away. If you think markets are over valued, don't DCA; just hold cash until markets drop to a point they are fairly valued. And since you cannot really know, but must have an expectation of markets going up over the long term or you would not invest at all, so just invest lump sums right away. Its the emotions that get in the way,

I had a couple of large amounts to invest and always did lump sum. I had a couple of "DOH! Why was I so dumb" moments, but looking back getting the funds invested right away was the right thing to do. Maybe 1929 and 1966, and 1989 for Japanese equity investors would have been the exceptions over the past 100 years or so.
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Re: Lump Sum vs DCA

Post by gdogg »

cardhu wrote: 1. I associate DCA with deploying “new money” ... when you switch from one equity to another, even if you have a gap between transaction dates, you are not deploying “new money” ... therefore, I would not consider this a DCA situation at all.
Well said; this reasoning makes perfect sense.
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Re: Lump Sum vs DCA

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2. Even when you are deploying “new money”, DCA does not offer any financial benefit, whatsoever ... it only offers emotional/psychological benefit ... you can see this in the discussion surrounding “regrets” or “disappointment” ... DCA is an exercise in managing potential regrets ... it has nothing to do with financial strategy.
OH OH, my whole financial strategy is based on controlling "emotional/psychological actions and regrets/disappointments" I knew I was doing something wrong. :shock:
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Re: Lump Sum vs DCA

Post by gobsmack »

What if the OP was talking about investing the funds in dividend paying stocks? For a large amount, he would have to buy stocks across all the different sectors and, for instance, banks look expensive now. Would lump sum still be appropriate?
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Re: Lump Sum vs DCA

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gobsmack wrote:What if the OP was talking about investing the funds in dividend paying stocks? For a large amount, he would have to buy stocks across all the different sectors and, for instance, banks look expensive now. Would lump sum still be appropriate?
One of the advantages of buying a broad index ETF, such as XIU or XIC, or VCE, is that you no longer have to worry about such questions.

(Yes, I know, the Canadian equity market is thin and unbalanced towards financials and natural resources, hence perhaps an opportunity for stock or sector picking -- or so goes the theory. But in practice I would still go with a highly diversified portfolio, which would include banks.)

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Re: Lump Sum vs DCA

Post by gdogg »

ghariton wrote:
gobsmack wrote:What if the OP was talking about investing the funds in dividend paying stocks? For a large amount, he would have to buy stocks across all the different sectors and, for instance, banks look expensive now. Would lump sum still be appropriate?
One of the advantages of buying a broad index ETF, such as XIU or XIC, or VCE, is that you no longer have to worry about such questions.

(Yes, I know, the Canadian equity market is thin and unbalanced towards financials and natural resources, hence perhaps an opportunity for stock or sector picking -- or so goes the theory. But in practice I would still go with a highly diversified portfolio, which would include banks.)

George
Correct. If I were to diversify further with stocks, I would probably exclude what is already heavily represented in the Canadian index (banks and energy). That is what I did in the past, but I'm avoiding individual stock purchases now.
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Re: Lump Sum vs DCA

Post by Peculiar_Investor »

AltaRed wrote:There are many threads in FWF talking about Lump Sum vs DCA, many acedemic articles analyzing same, and sites like finiki that discuss the same thing. The general consensus is that 'time in the market' provides a better long time return than 'timing the market'. That means buying when you have the funds to invest is, on average, better than doing otherwise. The biggest issue is 'buyer's regret' in those instances where your timing is off and you buy just before a market correction.
Completely agree with this summary. The OP might look at these search results and also these for some past FWF discussions.

On the "academic" side, I've posted the following article link a number of times, Dollar-cost averaging just means taking risk later | Vanguard. It is only 8 pages, so a pretty easy read.
Vanguard wrote:In this paper, we compare the historical performance of dollar-cost averaging (DCA) with lump-sum investing (LSI) across three markets: the United States, the United Kingdom, and Australia. On average, we find that an LSI approach has outperformed a DCA approach approximately two-thirds of the time, even when results are adjusted for the higher volatility of a stock/bond portfolio versus cash investments. This finding is consistent with the fact that the returns of stocks and bonds exceeded that of cash over our study period in each of these markets.

We conclude that if an investor expects such trends to continue, is satisfied with his or her target asset allocation, and is comfortable with the risk/return characteristics of each strategy, the prudent action is investing the lump sum immediately to gain exposure to the markets as soon as possible. But if the investor is primarily concerned with minimizing downside risk and potential feelings of regret (resulting from lump-sum investing immediately before a market downturn), then DCA may be of use. Of course, any emotionally based concerns should be weighed carefully against both (1) the lower expected long-run returns of cash compared with stocks and bonds, and (2) the fact that delaying investment is itself a form of market-timing, something few investors succeed at.
Re-read that second paragraph a few times and then I'd say it is up to you to decide which style suits you. In the linked article, Vanguard concludes with
Vanguard wrote:To be comfortable with either strategy, an investor must be fully aware of the fact that historical averages are only a guide—it is still possible for LSI or DCA to underperform or even lose money in any given period. If an investor is uncomfortable with the risks associated with a given market entry strategy, it may imply a low willingness to take risk in general, and if so, we recommend revisiting the target asset allocation to ensure that it appropriately addresses risk tolerance levels and investing goals.
I couldn't say it any better.

Since the OP is a newcomer to FWF, they might not be aware of our wiki. You might want to read Dollar cost averaging - finiki, the Canadian financial wiki which provides an overview and a number of useful links for further reading.
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Re: Lump Sum vs DCA

Post by calvado »

I was in a similar situation as yours 2 months ago.
I had 1.2M to invest with 750K available in january, 200K this week and another 250K in 3 months, spread accross taxable, TFSA, RRSP accounts.
Not counting a cash reserve of 400K (emergency fund, running fund, etc.)
At that time, the Dow was at an 'all time high' (I like this term, don't you?)
After a deep breath, took the plunge and bought 500K of XAW ETF and 250K of VCN ETF within the same week.
As of today, my XAW is up 21K (4,4%) while my VCN is down 5K (-1.8%)
I will hold on those ETFs for at least two decades.
I think that this debate is only a psychological one and you really have to take the plunge at one time and just forget about it.
Easier said then done, I know.

Now as of today, I have to buy 200K of fixed income stuff and I am super hesitant.
Thinking about a healthy mix of VSB, VSC and VAB but I am not sure yet.
Once it will all be clear in my mind, I will commit the 200K and buy everything during the same day.

Hope it helps !
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Re: Lump Sum vs DCA

Post by cannew »

If one is just buying etf or index, I don't think it makes much difference. Do they change much?
For buying individual stocks, then I think one should have buy points for each holding. Even then it may be prudent to just invest a portion of your funds. Never feel bad if you get a stock at a buy point and it goes down. Just buy more.
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Re: Lump Sum vs DCA

Post by SueC »

calvado wrote: 10 Mar 2017 21:00 I was in a similar situation as yours 2 months ago.
I had 1.2M to invest with 750K available in january, 200K this week and another 250K in 3 months, spread accross taxable, TFSA, RRSP accounts.
Not counting a cash reserve of 400K (emergency fund, running fund, etc.)
At that time, the Dow was at an 'all time high' (I like this term, don't you?)
After a deep breath, took the plunge and bought 500K of XAW ETF and 250K of VCN ETF within the same week.
As of today, my XAW is up 21K (4,4%) while my VCN is down 5K (-1.8%)
I will hold on those ETFs for at least two decades.
I think that this debate is only a psychological one and you really have to take the plunge at one time and just forget about it.
Easier said then done, I know.

Now as of today, I have to buy 200K of fixed income stuff and I am super hesitant.
Thinking about a healthy mix of VSB, VSC and VAB but I am not sure yet.
Once it will all be clear in my mind, I will commit the 200K and buy everything during the same day.

Hope it helps !
Did you put those 2 etfs in each of your accounts?
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