Hypothetical investment question,

[nk215]

Guys,
Please consider this hypothetical example:
You have large amount of cash ($500K) sitting in a money market account earning 1% interest. You need to move this to a long-term investment account. What would you do?

1) Put all the money into mutual funds (index fund whatever) in one deposit
2) Put it into the above mutual funds but spread that out over a few years @12-24K/month


You don’t want to “buy” high but I also want to avoid losing money to inflation (which is not bad at the rate of about 1.5%). Please note, at the net loss of 0.5%,, it’s only $2500/year
Which option is better and why?

 

[maddogchen]

Or you can put them in a bond index fund and then dollar cost average into an index stock fund.

 

[KB]

Although Lump Sum typically has a higher return on average:

http://seekingalpha.com/article/2220083-dollar-cost-averaging-versus-lump-sum-investing

Dollar Cost Averaging will make it much easier to sleep at night if the market crashes.
I would DCA.

 

[NikolaeVarius]

Shove it in a fairly conservative vanguard fund.

 

[nk215]

Or you can put them in a bond index fund and then dollar cost average into an index stock fund.

Can you me more specific. I only understand up to the bond index fund (as in Vanguard VBMFX). What do you mean by dollar cost average?

 

[maddogchen]

Can you me more specific. I only understand up to the bond index fund (as in Vanguard VBMFX). What do you mean by dollar cost average?

Oh, i mean put the 500k into a bond fund and then do option 2 which is basically dollar cost averaging. So you get a better interest rate while you move your money into stocks over the next few years

 

[nk215]

Oh, i mean put the 500k into a bond fund and then do option 2 which is basically dollar cost averaging. So you get a better interest rate while you move your money into stocks over the next few years

Let me repeat to make sure I understand correctly.

1) Buy 500K worth of conservative bond fund (VBMFX as an example)
2) Every month, log into the account, Sell the bond fund shares
3) Then Buy the VFIAX shares

All the gains in step (2) are short term gains then.

I am pretty bad when it comes to investment.
Thanks

 

[brianmanahan]

i would do like livesoft always suggests on bogleheads:

put %50 in right now, then %5 each month for the next 10 months

 

[maddogchen]

Let me repeat to make sure I understand correctly.

1) Buy 500K worth of conservative bond fund (VBMFX as an example)
2) Every month, log into the account, Sell the bond fund shares
3) Then Buy the VFIAX shares

All the gains in step (2) are short term gains then.

I am pretty bad when it comes to investment.
Thanks

Yes, you would need to keep track of all the selling and you would need to deal with the taxes. It might or might not be worth it to you.

 

[jagec]

i would do like livesoft always suggests on bogleheads:

put %50 in right now, then %5 each month for the next 10 months

This is a pretty good balance of "Get it in there early" and "DCA so you don't buy at the top".

 

[kranky]

i would do like livesoft always suggests on bogleheads:

put %50 in right now, then %5 each month for the next 10 months

History shows it's better to jump right in in most cases (after all, the market goes up more than it goes down), but I understand the psychological benefit of this approach - you can't be totally wrong if you happen to be unlucky and it makes people feel better.

But only if the money is going to be there for the long term. For short-term goals, stay out of the market and stick to savings accounts or CD ladders.

 

[dullard]

You don’t want to “buy” high but I also want to avoid losing money to inflation (which is not bad at the rate of about 1.5%). Please note, at the net loss of 0.5%,, it’s only $2500/year
Which option is better and why?

There is a mathematical best option. The problem is that no one will know the best option until it is too late to choose. And you aren't losing "only $2500/year" by waiting. You are probably losing the typical stock market return of 8% per year (minus the 1% you are already getting). So you should be thinking about the 7% * $500,000 = $35,000 a year you are probably losing by keeping it in the money market account.

I've faced this exact same situation many times (but divide the numbers by ~10). And so have many other investors. A common scenario is moving from one 401k to another, suddenly you have a large lump sum to invest. It can be painful investing it and then watching the market drop. But the market drops are rare and usually shallow. It is just as painful to sit on the sidelines and watch the market go up as it does on most days / weeks / months / years and you are losing your $35,000 a year twiddling your thumbs. After going through this myself many times and thinking back with 20/20 hindsight, I almost always wish that I just put it in all right away. I have waited a couple months in the past when falling markets seemed highly likely (such as in the market crash a few years ago, I don't catch falling knives). But I have always been happy that I finally got my money in.

I personally choose to do basically what Warren Buffet does. Get most of your money in the market into a well diversified moderately conservative group of stocks. Then hold some back to buy when you see a good opportunity.

So, try putting in $400k into a diverse fund (VFIAX was mentioned here and that is a reasonable starting point). Then save $100k for when you see an opportunity (such as a market that drops). That way you can have some of your cake, but mostly you just eat and eat and eat it.

 

[GasX]

Or you can put them in a bond index fund and then dollar cost average into an index stock fund.

bond index funds have all of the disadvantages of a stock fund and none of the advantages of bonds. If you want bonds, buy bonds. Bond funds only make fund managers money.

 

[dullard]

bond index funds have all of the disadvantages of a stock fund and none of the advantages of bonds. If you want bonds, buy bonds. Bond funds only make fund managers money.

Exactly. Listen to GasX. Bonds should be purchased directly and not lumped into bond funds. It is easy to do, there is no reason to pay someone a fortune to buy bonds for you.

A bond that you purchase directly is virtually guaranteed to go up (especially a treasury bond that has never defaulted) as long as you hold it to maturity. A bond fund can go down, down, down to zero (which is more true if you consider the high fees that are likely associated with the bond fund).

 

[nk215]

Thank you all.

I've been kicking myself for not investing earlier and have been catching up religiously about a year ago. Time was such a terrible thing to waste in the world of investment.

 

[pete6032]

Dollar cost average and buy TIPS with the money you're not putting in right away.

 

[alien42]

i would build a portfolio of high dividend stocks.

 

[BurnItDwn]

I would buy 3 magic beans then PROFIT

 

[dullard]

i would build a portfolio of high dividend stocks.

With after-tax investments? That seems a bit unwise unless you plan carefully. Suppose you put in $10,000 today into a stock that pays a high $500 dividend on March 31st. More likely than not on April 1st, you'll have $500 in cash, $9,500 in stock, and a tax bill of ~$115 (depending on tax bracket and state).

High dividend stocks do far better in retirement accounts where you don't pay yearly dividend taxes (or for after-tax investments of this size you may now be talking quarterly estimated taxes).

 

[iCyborg]

Exactly. Listen to GasX. Bonds should be purchased directly and not lumped into bond funds. It is easy to do, there is no reason to pay someone a fortune to buy bonds for you.

A bond that you purchase directly is virtually guaranteed to go up (especially a treasury bond that has never defaulted) as long as you hold it to maturity. A bond fund can go down, down, down to zero (which is more true if you consider the high fees that are likely associated with the bond fund).

Sure, you can buy bonds yourself, but then you'd have to do research yourself: which bonds to buy, what maturity dates etc. And to be similar to bond index funds, you'd need to laddering yourself. This is a lot more involved than just "it's easy to buy bonds". Vanguard has bond index ETFs with MERs 0.10-0.15%. Even if you buy bonds directly, you pay a small markup through brokerage anyway. Even with 500K, I probably wouldn't find it worthwhile to spend time and avoid that 0.1% which is $500.
In the same spirit, you could say "avoid index funds and just buy stocks to form a similar portfolio and avoid fees". It is true *if* you value the MER difference more than your time to do the proper research...

 

[brianmanahan]

A bond fund can go down, down, down to zero (which is more true if you consider the high fees that are likely associated with the bond fund).

at %.08 ER for BND, it'd take a long long time to go down to zero.

total amount lost to ER would only be like %3-%4 by the time i die.... i'm OK with that.

 

[uclabachelor]

Guys,
Please consider this hypothetical example:
You have large amount of cash ($500K) sitting in a money market account earning 1% interest. You need to move this to a long-term investment account. What would you do?

1) Put all the money into mutual funds (index fund whatever) in one deposit
2) Put it into the above mutual funds but spread that out over a few years @12-24K/month


You don’t want to “buy” high but I also want to avoid losing money to inflation (which is not bad at the rate of about 1.5%). Please note, at the net loss of 0.5%,, it’s only $2500/year
Which option is better and why?

Depends on what your definition of "long term" is and your risk tolerance.

You could put in 20% every year and either average up or down after 5 years, or you can put in 100% the first deposit and either lose some or gain some the next 5 years.

But on typically over the long term of 20+ years, you tend to gain unless of course you withdraw your money at the bottom of the cycle like in 2009.

 

[LegendKiller]

Exactly. Listen to GasX. Bonds should be purchased directly and not lumped into bond funds. It is easy to do, there is no reason to pay someone a fortune to buy bonds for you.

A bond that you purchase directly is virtually guaranteed to go up (especially a treasury bond that has never defaulted) as long as you hold it to maturity. A bond fund can go down, down, down to zero (which is more true if you consider the high fees that are likely associated with the bond fund).

Lol....


Bonds are not virtually guaranteed to go up in value. Sure, the can roll down the curve but that is assuming the curve is still favorable at the new point. And bond funds aren't going to go to 0. That's just silly. It's like saying a stock mutual fund is going to go to 0.

Recommending buying individual nonds? Based on what? Rating (ROFL)? Are you going to do the fundamental analysis to figure out whether it is a good or bad value? How are you going to judge relative value? How do you feel about rate and spread duration, z-spread, or should you go fixed or floating? Should you go to mortgages? Buy IO strips? Inverse IOs? Should you buy Fannie 3s or 5s? How do you think the Fed's decisions are going to affect those? Should you be long duration or short? Should to put in a flattener? What part of the curve?

Not a single person has mentioned a thing about duration. In a raising rate environment no less!

Be careful about the advice you give.

My advice? Buy a short duration fund for the next year or two. Something with a 1-2 year duration, 3 max. Avoid corp bonds or other bullet type bonds and buy something that has more spread duration than rate duration as risk spreads will likely come in rather than go out.

As far as your money market account, you could keep some money in there. MM rates are going out now due to several of the big funds switching over to government securities. This has hit some of the more esoteric markets first but it will eventually affect all of the big prime funds as they switch over to government securities. This is probably going to be a 500BN+ rotation out of corporate CP, ABCP, and others, in to governments. That'll be huge for funds that don't switch over to governments since their rates will go up. If you can find a retail fund that sticks to a $1 NAV but picks everything but short govvies you'll actually get a decent return for <1yr paper.

 

[DrPizza]

Your age? At 20, you can afford a bit more risk - stocks will eventually rebound, even if they do go down. At 50, you can't afford quite as much risk.

 

[dullard]

Sure, you can buy bonds yourself, but then you'd have to do research yourself: which bonds to buy, what maturity dates etc. And to be similar to bond index funds, you'd need to laddering yourself. This is a lot more involved than just "it's easy to buy bonds". Vanguard has bond index ETFs with MERs 0.10-0.15%. Even if you buy bonds directly, you pay a small markup through brokerage anyway. Even with 500K, I probably wouldn't find it worthwhile to spend time and avoid that 0.1% which is $500.
In the same spirit, you could say "avoid index funds and just buy stocks to form a similar portfolio and avoid fees". It is true *if* you value the MER difference more than your time to do the proper research...

No research is needed. Bonds aren't for your risky investments searching for big buck gains. That portion of your investments are for a safe steady growth. Go to treasurydirect.gov, buy the term you need, and you are done.
http://www.morningstar.com/cover/videocenter.aspx?id=397758