Help me evaluate this investment strategy.
March 23, 2012 2:25 PM   Subscribe

I've been happily making regular investments, but I suddenly have a lot more money to invest. How should my strategy change, it at all?

For the past few years, I've been purchasing a mix of Vanguard ETFs on a near monthly basis. I invest roughly the same dollar amount each month and upsize and downsize my individual buys just enough so that the overall mix of assets I hold accords with my target allocation at the end of each investment cycle.

This plan was working just fine, at least in my opinion, until I got a big bonus. Now I have a lot more money to invest, and I can't decide if it makes sense to substantially increase the monthly buy. Prices now are at the high-end of what I've paid historically, so piling in now means my average per share costs will increase substantially. That said, it's not like the money is earning or could earn good risk adjusted returns elsewhere. Dividends are, of course, also a factor.

I suspect that since I'm investing for the long term and don't presume to know when the next market drop will occur, I should just get comfortable with bigger regular buys, which may skew numbers in the near term while not making much difference over the course of longer periods of time, but I'm hoping the hivemind can confirm or deny.

I'm aware that this is a good problem to have. Thank you in advance for your input.
posted by theexpgen to Work & Money (10 answers total) 5 users marked this as a favorite
 
You got a bonus (one-time payment) or a raise? Do you already have more savings in short-term vehicles?
posted by jacalata at 2:29 PM on March 23, 2012


I don't have a good answer for you because I don't know the rest of your financial situation, but out of curiousity, are these retirement (tax-deferred) accounts? Or taxable?
posted by small_ruminant at 3:08 PM on March 23, 2012


I would continue to dollar-cost average like you have been, but then I'm an amateur and the regularity appeals to me.
posted by InsanePenguin at 3:14 PM on March 23, 2012


Are you maxing out your preferred investment/savings vehicles - commonly IRA and 401k or 403(b) shelters?
posted by the man of twists and turns at 3:27 PM on March 23, 2012


Has this new money substantially changed your willingness and/or need to take risk? If so, you'll need to rethink your asset allocation. Most likely, though, I'm guessing it has not and you'd like to continue with your current allocation. In that case, based on backtesting, it's been shown that just investing it all in a lump sum immediately will provide the best expected return. However, for psychological benefit, many people prefer to invest a large sum using dollar cost averaging over months or even years depending on the size. Ask yourself, will you feel strong regret if you lump sum invest now and the investment drops 20% in a couple months? Maybe space it out then.
posted by Durin's Bane at 3:37 PM on March 23, 2012


...I invest roughly the same dollar amount...so that the overall mix of assets I hold accords with my target allocation at the end of each investment cycle...

...so piling in now means my average per share costs will increase substantially...


You have two conflicting concerns here. I think there are intelligent people who would give you opposite advice. One side would say that asset allocation is paramount and that the only reason you wouldn't go fully invested immediately is because you think your investments are overvalued--and if you thought your investments were overvalued, you would have already changed your allocation targets to reflect that. The other side would say that you should avoid market timing no matter what and would advise you to dollar cost average to your target allocation over time. The first group would have a sharp retort to that and so on and so forth.

I'd probably put myself in the first group, but you'll probably feel best if you dollar cost average over 6-12 months.
posted by mullacc at 3:45 PM on March 23, 2012


As you probably already know, DCA is most at a disadvantage when the market just goes straight up, and even then, it's not at a huge disadvantage.

I was in a position a lot like yours not too long ago, but I decided to just go all-in. It ended up working out for me (the market never went down in the time frame I was considering averaging), but it was definitely a little more risky. You'll probably feel more comfortable doing DCA.
posted by thewumpusisdead at 3:53 PM on March 23, 2012


The first rule of investing is to diversify, so I would consider other investment houses, other products, other markets, commodities etc not because you expect these to give a higher return but just to give yourself a bit of extra safety in case the financial world goes into another meltdown.
posted by Lanark at 3:57 PM on March 23, 2012


Response by poster: jacalata - this was a bonus, not a raise. i have a liquid emergency fund that'll cover more than a year's worth of expenses.

ruminant and tmotat - this is a taxable account. i max out my 401k each year.
posted by theexpgen at 8:29 AM on March 26, 2012


You can still contribute to an IRA for the year, up to $5,000 if under 50, and up to $6,000 if over 50.

IRS site on contribution limits.

IRS matrix on contribution and deduction limits.

Roth and Traditional IRAs have different tax implications and withdrawal time requirements, as well as inheritance implications. There is lots of good info, and you will be able to contribute for Tax Year 2011 up though the filing date of April 15th, as well and contribute for Tax Year 2012.
posted by the man of twists and turns at 9:28 AM on March 26, 2012


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