Investing a windfall in the stock market now? Dollar cost averaging? Lump sum? Wait?
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Anonymous
| My husband's mom passed away, and we received a $330k windfall in the form of her IRA, which now makes up 42% of our non-retirement assets. We are going to take minimum distributions to take advantage of the IRA's tax-deferred status, and he has about 30 years to take distributions. My question is: If you had this money to invest in a broad stock market index (like Vanguard Total Stock Market), would you put it in as a lump sum, dollar cost average it ($10k/week), or not put it in the market right now at all? And why do you think one way of investing should be done over another? Thanks! |
Anonymous
| I suspect DCUMers will recommend taking the dollar cost avg path. I'd, however, wait it out little bit. Market is sending all kinds of warning signals that it is about to turn sour (yes, I know you can't time the market)... |
Anonymous
OP here: That's where I'm stuck! I know we should invest the money instead of having it sit in a money market account, but the market is at an all-time high and several indicators point to a downturn. |
Anonymous
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If you're talking about what to do with the required minimum distributions, then the amount you will have to re-invest will be $10k/year, not $10k/week. After backing out income taxes, you're not talking about a huge amount of money - something on the order of $600/month. With dollar cost averaging, you're subjecting yourself to very limited risk as you build up on equities. If the market corrects, it's not a whole lot of downside.
The bigger question is what to do with the investments in the inherited IRA. How well balanced between equity, bonds/fixed income, and cash is it for your time horizon rather than his mom's? Assuming it is a lot more in fixed income and cash, then you'd want a plan to re-balance into equities for the long term. Again, dollar cost averaging makes the most sense because it limits your risk as you take a riskier class of investments. The alternative would be to move it to equities in bigger chunks, subjecting you to more market risk, not less. If his mom had all equities, re-balancing it one fell swoop would make more sense. |
Anonymous
No economic indicators point to a downturn (other than Trump paranoia in the NYT for the last 2 years). The stock market is sound, with a very reasonable PER thanks to growth and economic reform -- we are still all in. Now, there's quite a bit of volatility so you may want to sequence things a bit over the next few months, and prioritize safe stocks, but I think the major risk right now is to have big piles of cash waiting around. |
Anonymous
| Why are piles of cash risky? |
Anonymous
Their long-term value erodes due to inflation. The market is very often "at an all time high" because it tends to go up each year. If your time horizon for using this money is 30 years, I wouldn't worry too much. I would just put it in the market in line with your overall asset allocation (e.g., 70% stocks/30% bonds/cash equivalents--or whatever you have for the rest of your portfolio). The only difference is that with the RMD you'll be drawing it down. But you could just take the RMD each year and use it to contribute to your own IRA so if you have to sell low, you're also immediately buying low too. If you plan on using the RMD rather than re-investing it, then you could tilt the asset allocation a bit more to cash--e.g., have the next 3 years of RMD in cash equivalents and if the market is down tap those. As for whether you should dump it in or dollar cost average, it's really just psychological. The most sense is just to put it in since no one can know the future but history tells us the market trends up in a wide variety of conditions. |
Anonymous
This. I’m a liberal and admit every liberal media has been saying the downturn is coming and it never does. Remember when they said the market would crash when Trump won? |
Anonymous
OP again: thanks for responding! Yes, we’re planning to use the RMDs to find my husband’s IRA. The question is how to invest the 330k that is sitting in a money market fund in the IRA into the stock market. It would be 2/3 of our liquid, non-retirement assets, so I’m afraid to invest it all at once. |
Anonymous
Exactly. Anyone who bought into the paranoia 2 years ago and stood out the stock markets would have missed the 40% or so upside since Election Day. I don't even want to think about any brave soul who went as far as shorting the Trump market. |
TwistdMike
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Google Dave Ramsey and listen to his advices regarding inheritances, taxes, rollovers.
He also has trusted advisors in your area listed on his web site, might be a good choice in this case. |
Anonymous
The market spends the vast, vast majority of its existence near all time highs. |
Anonymous
Wow. I've been through 3 market downturns. Why am I pretty sure you don't remember the last one? |
Anonymous
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OP -- how many years until your retirement? It sounds like you 10+ years away. If so, just invest it all. Market highs right now will look like great prices 10 years from now. Yes, we'll have a correction "soon" but it might be 6 months from now, or it might be 2 years from now, or it might be 5 years from now. Who knows? If you're investing for the long term (10+ years) the corrections won't matter in the end -- just put your money in and set it and forget it.
Meet Bob, the World's Worst Market Timer: http://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ |
Anonymous
Do not do this! His trusted advsiers charge very high fees. Stick with Total Stock market like you were thinking. I think Vanguard has a study that shows 2/3 of the time a lump sum contribution will outperform dollar cost average. That won’t matter if you wind up being one of the poor souls who lump sums in and the market declines. It IS just psychological, but if dollar cost averaging will help you commit to getting the money invested, than that is what you should do. |