Ask the Grumpies: Dollar Cost Averaging

First Gen American asks:

I’ve been sitting on too much cash for almost a year now. (I had 2 pension payouts among other things and it’s still not invested). Market has scared me and being very close to my magic retirement number I am much more gun shy now and I know it’s something I need to address….or do I? I think dollar cost averaging is the answer as that is why I didn’t invest when everything was 18000 because I don’t think at the time It was the bottom. It dropped more in 2008…but everyone says finding the bottom or top of the market is near impossible.

We are not professional financial advisors.  Please do your own research or listen to a fee-only financial planner with fiduciary responsibility (Not Edward Jones!) before making any important investing decisions.  #Disclaimer #pleasedontsueus

Walter Updegrave, who is one of my favorite professional popular personal finance peeps says that you should just invest the lump sum all at once in the asset allocation that you want.

This is retirement money.  Even if you start drawing on your retirement money in 10 years, you’re not going to be drawing down all of it for decades yet.  That means that the long term is what’s important, not the short term.  And by delaying, you are missing out on market ups, not just the market downs.  It is extremely unlikely that you will accidentally put money in at a 10 year peak.  Most likely, even if you put it in during a peak,

Remember, without a working crystal ball, you cannot optimize the market.  You can only get a good expected value.  You can only mitigate risk.  By the time you need this money, the market will have gone up, and it will have gone up more than leaving it in your 0.5% savings account.  On average, according to Updegrave, you’re better off putting the money into the market/bonds in a lump sum than you are dollar cost averaging.  In simulations, dollar cost averaging wasn’t even close to lump sum, assuming that your lump sum took into account your stock/bond mix.  The trick is that you diversify with market allocation, not just market timing.  That is, when stocks are doing well, bonds aren’t as attractive and when stocks aren’t doing well, bonds are more attractive.  Market allocation is something you can specify, but you cannot time the market itself.

So, bottom line, decide on your overall stock/bond allocation and use these lump sums to get your money into those percentages.  That’ll help you rebalance too!  Which is another thing that you can control better than you can control market timing.  You may also be able to save some on fees with a lump sum depending on how your brokerage works (if it’s a flat fee vs. %).

The one exception is if you are putting off doing lump sum investing because you’re trying to time the market.  If you just keep putting it off, then for goodness sakes, some of that money in the market is better than none, so dollar cost average it.  Basically, if you have a lump sum:  lump sum > dollar cost averaging > putting off putting a lump sum in.  If dollar cost averaging helps you actually take the plunge, then set it up!  Otherwise, just put that lump in today!