Hi, I'm 35 and I have $100K to invest in an index fund. I don't want to miss the market's slingshot. Should I dollar cost average $10K a month or lump sum it? Also, I'm on step 6 of the Financial Order of Operations
First of all, I love that you're thinking about putting this money to work. You have a substantial chunk of cash, and you're making a decision for your future self, which is awesome. The question is, what's the best way to invest it in low-cost index funds - lump sum or dollar cost averaging?
Well, Vanguard did a wonderful study a number of years back, and they said that looking at rolling periods over the long term (I don't remember how far the data went back, but it was probably back to the 1950s or 1960s), it's more advantageous if you just lump sum invest. That makes sense because 8 out of 10 years, the market's up, so if you put the money in, odds are it's going to go up over the long term, and you're going to turn out okay.
However, in our opinion, there's still merit to dollar cost averaging, and oftentimes it's less about the dollars and cents and probably more about the mindset. This is not a specific recommendation to you, Don Don; this is just getting the generalities out there.
When we look at research on dollar cost averaging for clients, a lot of times, we're also dollar cost averaging every month with their 401K retirement plans and their monthly savings for turning wages into wealth. But when we come to a lump sum like this, typically we try to put some boundaries of time on it so that you don't get left behind.
So, when you say $10,000 a month or $100,000 all at once, you've obviously done the research. That $100,000 divided by 10 is $10,000 a month, so good on you, Don Don.
The big question I would have for you is, what is this of your total net worth and assets? And have you already compared this? Since you've said you're at step six, that means you've already gone through steps one and four, which is the emergency reserves. That means you've already gone through step five with the Roth assets. So, if this isn't life-changing money and it's for something that's 30 years in the future, then this is going to be a blip. That puts it more in the lump sum category for me.
I've definitely leaned heavily into dollar cost averaging when somebody sells a huge asset that's once in a lifetime, so if it lost 40 percent next month or over two or three months, it would be devastating to your future. That's when you without a doubt better come up with a good DCA approach because the risk of disaster is out there.
If this purpose is so far out in the future and it's not going to change your life forever (it will in the long term, but it's not like devastating if it went down 20%), let's put that money to work.
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