Should You Invest a Lump Sum All at Once?

There was an interesting article in Money magazine this month about dollar cost averaging.  Typically, this is where you would buy investments at regular intervals, for example putting $500 per month into a mutual fund over a period of several years.  The idea is that then you buy shares both when prices are high and low, buying more shares when they are low (since you’re putting in a fixed amount of money each month).  Buying more shares when prices are lower means that you’ll get a cost basis lower than the average stock price for the period over which you were buying, so even in a flat market you’ll make a small profit.  Dollar cost averaging is a great idea since it 1) does get you a good price and 2) gets you putting away money regularly, which is the secret to becoming financially independent.

What the article was really talking about, however, was whether it was better to invest a lump sum all at once, or invest a portion of the money each period over several periods.  For example, if you got a $1M inheritance or a big lump sum payout from a pension fund, should you invest it all at once or maybe put in $50,000 per month for a couple of  years.  Their conclusion was that it is better to just drop it all in at once.  I’m not sure I agree.


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They cited a study by Vanguard that showed that you’d be better off 2/3rds of the time just investing all at once than spreading it out over several periods.  This makes sense since the market goes up about 2/3rds of the time.  Their reasoning for doing so despite what happens the other 1/3rd of the time – when the market declines after you invest – is that if you plan to put 60% in stocks and 40% in bonds, for example, you’re already investing to manage risk.  It therefore makes little sense to hold back cash and go against your investing plan.

The problem I have with this plan is psychology.  It would be devastating for most people to invest the $1 M they’ve gathered up all of their lives in their pension plan and see a 40% loss as we saw in 2008.  It would be even worse to see another event like the market crash of 1929 where 90% of the value was wiped out and it was more than 15 years before people were back to even.  Many people would simply cash out and go into T-bills and bank CDs after suffering through such an event.  As we saw in 2009 and 2010, this is often exactly the wrong thing to do since markets have almost always recovered fully from such events within a year or two (1929 being the exception).  If someone invested just $100,000 of a $1 M lump sum right before the drop, hopefully they would see it as an opportunity and continue to invest in regular increments.  Even in 1929 they would have made out like bandits this way because it is right after large drops that the market is on sale.

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So yes, statistically it is better to invest all at once, but psychologically it is better to wade in slowly. The consequences of dropping a large sum into the market right before a major event are also so severe that a 66% probability of doing better just really isn’t worth the consequences of being wrong.

Even when building up  position in a stock I tend to wade in, rather than taking the plunge all at once.   For example, if I wanted to build up a 1000 share position in BJ’s Restaurants International (a company I usually have a big position in and which I have on now), I wouldn’t typically just put $40,000 into it to buy 1000 shares at $40 even if I had the cash sitting around.  Instead, I might buy 200-300 shares, gather up more cash over the next month or two, then buy another 200-300 shares.  If the stock drops in price, I might use the opportunity to buy more shares at once.  Doing so actually makes drops in share price a good thing that I look forward.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Buy on the Rumor, Sell on the News

 There’s an old saying in Wall Street that you should “Buy on the rumor, then sell on the news.”  The meaning is that when you start to hear that something is going on at a company through the rumor mill, you should load up on shares.  When the actual news comes out, however, it is time to sell because the effect of the news is already priced into the price of the shares.  To take advantage of news, you really need to get in before everyone else, which means before the news breaks.
Many novice investors will hear news on a stock and buy or sell shares as a result.  For example, there were likely a lot of people who went out and sold shares of United Airlines the day after the video of the passenger being slammed into the arm rest and then thrown, face bloodied, off of the plane.  I mean, that can’t be good for future sales, right.  The memes that went around the next week with phrases like, “United: Fight or flight, we decide.” and jokes about the United “fight club” don’t build brand loyalty.  Some people probably even sold shares short (which is when you borrow shares and sell them, planning to buy them back later at a lower price and keep the difference).

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The issue is that the news was already out there.  By the time the next morning came around, everyone already knew that United had messed up royally, and the comments by the CEO about the passenger being at fault didn’t help.  So put yourself in the shoes of the other person in the trade – the one who was buying the shares.  Would you have paid the same price you would have the day before, before the incident occurred?  If you wanted to buy the shares at all, you probably would have only been willing if the share price were 10%, 20% or even 30% lower.  You would be expecting a big discount since obviously the next earnings will be a bit lower than they were before.  The shares were not as valuable as they were a day ago.

Let’s use another example not related to the stock market.  Let’s say that you own a car that is worth around $25,000  and you accidentally drive it into a lake.  Let’s say that the fact you drove it into the lake makes the news and everyone knows about it.  Could you expect to then sell that car for $25,000 with everyone knowing that it was driven into a lake and probably fouled the engine and everything else?  The price would drop instantly the moment the news got out.  Someone might offer you a few hundred dollars, either to use the parts or with the plan to fix it up. Just because it was worth $25,000 before the event doesn’t mean you’ll be able to sell it for $25,000 after the news breaks.


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It is exactly the same thing with stocks.  There is something called “the efficient market theory,” which says everything known about companies is instantly priced into the price of their stocks.  This means it is pointless to try to buy and sell stocks based on the news that comes out because the stock is already priced to take that news into account.  Everybody knows the car has been in the lake.  The best you’ll get is a couple of hundred dollars.  It doesn’t matter how much it was worth the days before or how much you still owe on the car.   It also doesn’t matter how much you need to buy another car.

For this reason this blog will never recommend trying to trade stocks, where you buy one day and then plan to sell a few days, weeks, or months down the road for a profit.  All of the news you hear is already priced into the stock price.  Everyone else has already looked at the same charts you have and sees the same trends.  Everyone else knows that the company is coming out with a new product, or that product A is selling well, or that Baby Boomers are retiring.  The stock is already priced correctly for all of that news and anything you’ll see over a periods of weeks to months is just random noise.  You have a fifty-fifty chance of making money.  Investing is putting your odds way into your favor.

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That said, there is a way that you may be able to take advantage of big news that comes out.  Right after the news breaks, people often overreact, especially if it is bad news.  People don’t really know how big the effect of the debacle will have on United’s share price, so they tend to price it considerably lower until the dust settles.  I mean, if you were buying shares, would you buy if you didn’t think you were getting a screaming deal?  You would want a little insurance.

As a result, if you already owned United shares and were looking to add more, or you were planning to buy before the news and still wanted in, you might be able to buy shares right after the news breaks, a little at first, and then a little more if the shares continue lower, and get a really good price.  Often after the dust settles you’ll see a bit of a bounce back.  This won’t make you rich, but might let you get a little better price than you would have otherwise.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Taking Advantage Of Stock Weakness

Interesting post from Girlvestor below. This shows the issue with trading based on news. I’m sure many people heard about the United Airlines treatment of their customer and reacted by selling the shares. The issue here is that the news is already out there, so the effects of the horrendous United customer service are already priced into the price of the shares before you are able to hit the sell button. Often these things get overdone, however, so you might be able to take advantage as Girlvestor did. Often the shares will trade way down to start and then recover a lot of the loss the next day. I wouldn’t recommend buying and selling this way to make quick profits, but if you’re already setting up a position, it may make sense to take advantage of such events to add a few shares.


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