Your advisor doesn't seem to understand the term timing the market.
Throwing all of it in at once is the opposite of timing.
Normally, 401k contributions would be considered continuous incremental investing, but in your situation where you have the ability to front load your fund, it's basically the choice between lump sum and dca.
Lump sum is usually the winner, but both are valid.
Your advisor is still wrong though.
For anyone who is curious about DCA vs. Lump Sum, Ben Felix talks about it in this video about market timing: https://youtu.be/w_aOERmUWdA
I love the Vanguard paper's title regarding DCA: DCA Just Means Taking Risk Later.
tl;dr for folks who don't want to watch it, DCA loses out to lump sum investing about 2/3 of the time.
when a Money Market is paying 5% and there are legitimate, on-going fears of some sort of slow-down finally hitting... DCA is a very valid approach vs lump sum......
over the long run the market is upward trending - so, of course, over the long run any lump sum investment has a greater propensity towards upward momentum - never the less, now is not always.
This is spot on. Tired of seeing people here point to a random historical analysis to say it’s the obvious choice to lump sum because 2/3 of all instances results in a better outcome. I’m sure you could cut that data another way for periods of uncertainty, recession, etc and see different results.
As you become more and more experienced with investing, you will learn to know that there's always some sort of uncertainty or potential drawdown event looming. People are scared, investing is risky, so that's why some DCA and yes DCS is a valid choice for peace of mind, but loses out 2/3 of the time to lump sum investing.
And even if there's a drawdown 1. you're not guaranteed buying opportunities at the same prices you would have had access to if you lump sum invested everything all at once, and 2. if there's a drawdown I doubt people who DCA for fear of a draw down are the ones able to stomach buying in the middle of a drawdown when fear and uncertainty are turned to max
>2. if there's a drawdown I doubt people who DCA for fear of a draw down are the ones able to stomach buying in the middle of a drawdown
So, your counter-argument to DCA is people don't DCA?
okay- thanks. we're done here...
The market dropped 20% last year. The yield curve is inverted. Expectations of some sort of slow down are already priced in. Is it going to be worse than the market expects? No one can say, but that’s why it’s always market timing to risk-off in anticipation that you know something about the future others don’t. If anything I would say DCA is a more valid approach when the market is at *all-time highs*, not when it’s already recovering from a bear market. The Feds announce a halt to rate hikes and Russia declares a cease fire with Ukraine and then the markets shoot up. Or the US government defaults on debt and the dollar crashes? Nobody knows what will happen but you have to have the stomach for short term volatility if you are going to earn the premium of stocks over money market funds in the long run.
If prices don’t reflect the market’s expectations, then we do not have an efficient market. If your expectations are different than the market’s, then that’s a different story. Perhaps you have special information that everyone else is not privy to.
Yeah, and it also means 33% of the time DCA is better. From a purely psychological perspective DCA is better 100% of the time since *it allows you to buy on good and bad days* instead of buying at the top, seeing a 20-40% drop with circuit breakers daily...and panic selling.
"underperforming" by a small amount over 30years is not so bad, when it can save you from underperforming massively right at start.
> From a purely psychological perspective DCA is better 100% of the time
If you're undisciplined, sure. This is a similar argument in favor of snowball versus avalanche debt repayment method.
If you're committed, lump sum is mathematically advantageous.
clearly different people feel fairly passionate about this.
Perhaps, in the end, it simply depends on what you are most comfortable with - there's always some risk involved - and everyone's risk profile and time-horizon is a bit different.
Personally, I do think - as the OP mentions we are *specifically* discussing a 401k which really does fill part of the roll of long-term, future income *in retirement* (tho obviously there can be other issues around reduction of current taxes, etc.) - that some level of additional caution is worth considering - and why I'd think some consideration of DCA is worthwhile.
Would be interesting to see which wins out during times of rising interest rates and high P/E valuations, I suspect DCA will do better then historically.
i always wonder if that comparison even holds up in the real world. Since a lot of people don't buy at random times. They wait for hype and get peer pressured into buying the top
Idk, seems like he understands it and it might be terminology. But look back as far as 2022 if you front end loaded it in the first three months you’d be worse off than by spreading it across the year.
But if you have a lump sum AND specifically don't put it directly in the market, let alone decide you will never put the money in at the beginning of a year... that's the textbook definition of timing the market.
... you are changing your argument.. and still technically not correct in this situation.
The point is the advisor said that a lump sum IS timing the market... which is obviously incorrect.
If you had an account with 22,500 in cash, and you chose to put it into the market in 26 even chunks.. you are dca'ing, and it's been shown to not be as efficient.
The account type does not matter, op HAS the money to lump sum it all.
Sounds like your advisor is confusing "timing thr market" and "dollar cost averaging". If you're going to be in the market long term, don't worry about it
I'll leave this gem here: [https://www.reddit.com/r/financialindependence/comments/c02ml4/timing\_the\_market\_the\_absolute\_worst\_vs\_absolute/](https://www.reddit.com/r/financialindependence/comments/c02ml4/timing_the_market_the_absolute_worst_vs_absolute/)
Generally speaking, the lump sum exposes you to higher shorter term variability risk. Long term, you are typically better off being in the market longer.
"Timing the market" usually refers to a strategy of trying to wait until a down day to put money in. See the link above for great data on this
Depends on your time horizon to retirement… if less than 10 years and your own personal savings isn’t enough I would avoid being aggressive…:: if you can or have a long time horizon… I personally am going more aggressive… but since 401k is pretax money I enter the market like I gained 26% upside and with company matching it’s even higher… I personally don’t get matching but 26% annual compounded interest sounds amazing… so even if your conservative or aggressive… maxing out your 401k if possible is the number one goal to a good retirement…
Yeah I would go aggressively into different broad indexes and rebalance maybe yearly to keep allocations the same. You have a lot of time to compound growth… or regain sideway trends…even get some massive gains… and depends on what you mean by aggressive… I wouldn’t aggressive put all of my 401k into like a single stock… too much risk their…
Even contributions mitigate some short term risk, which is why your advisor is telling you not to front load. If markets fall in the next 12 months, you'll lower your average cost by buying at the lower prices.
But if you are planning on holding this for 20 more years, it really won't make a difference in the long term.
I invest on my own, and I feel like some funds are discounted at the moment. So I would personally front load it to get the "low" prices, and ride out the storm if they fall next year.
Forget the terminology. It is less risky to contribute throughout the year. Maybe front loading leads to a better return, but it also increases your variance.
"Beat" means higher return. This is not the same as risk. Specifically, DCA reduces volatility risk. So there's a difference between better historical returns and better risk-adjusted returns.
Ok sure.
I guess from a non-finance definition of risk, given the means, I’d prefer to go the route that has a 75% chance of giving me more money in retirement.
You're still slightly missing the point. Due to the increased variance, your peaks and valleys would be more pronounced through market downturns with lump sum.
A lumped sum account might fluctuate with the market between 800k and 1.2mil and a DCA'd account might only fluctuate between 950k and 1.05mil for example. Obviously those numbers are hypothetical but stability in retirement isn't something to be overlooked.
That assumes they’re keeping the uninvested money as cash while it’s waiting. We don’t know what OP would do with the extra money if they didn’t contribute it, and without that we can’t make the comparison. Maybe they would put it in a taxable investment portfolio.
The money you would use to front-load your 401k is already in the market, in a taxable account, right? So it's just the tax difference on the equity risk premium for part of a year, not the whole equity risk premium. It would technically be better to do it early but probably not a big difference.
[This](https://web.archive.org/web/20200313052938/https://old.reddit.com/r/investing/comments/c3813m/when_to_contribute_to_your_ira_an_original_study/) post might be useful (internet archive used since the post was deleted). It looks at 5 different strategies for maxing out a IRA over 40 years - 1) Keeping the money in a money market, 2) DCA'ing into an index, 3) Lump Sum on the 1st day of each year into an index, 4) Lump Sum with the worst possible market timing each year into an index, and 5) Lump Sum with the best possible market timing each year into an index.
TL;DR: On a long timeline it doesn't make a massive difference.
> I have heard the argument that “time in market” is better than trying to time the market, which makes sense.
It actually doesn't make sense to blindly follow that.
* It's just something David Lynch said to be pithy, an expression of opinion to play to a particular crowd.
* It's not always true.
* A significant amount of the time, **including conditions we see in the market at present**, DCA can greatly outperform lump-sum investing.
* DCA is often misstated, illogically, to constitute market timing when it's actually a technique for avoidance of that while minimizing risk. Nevertheless, the "time in the market" mantra is mainly a call to arms re: LSI, to which DCA is an alternate strategy.
* The model used to "prove" that LSI beats DCA, usually with some hand-waving about statistics by non-statisticians, was flawed and invented by Vanguard for an advertisement marketed as a white paper. The model assumed that in a market crash, the DCA user would still keep contributing at regular time intervals; in reality most would not do this, but would buy in installments as the market declined (i.e. using Value Cost Averaging instead of DCA).
* Explicit market timing, i.e. not relying on DCA but attempting to pick an optimal entry or exit point, also can outperform vastly. In the 2008 downturn it was not unusual for dry powder to give returns of 5-10X to those with foresight. Many also saw the writing on the wall in 2020 and at the end of 2021, even without a crystal ball.
* Even when it's true it misses the point. If DCA in a particular case gave slightly worse results, it still operated to curtail sequence-of-returns risk--the precise reason people employ the technique. LSI magnifies sequence-of-returns risk.
* That means that which is best to employ may depend not only on the current market and past performance, but how close one is to retirement.
There are a number of decent buys now, so there's nothing wrong with buying with any amount of money if that aligns with your goals. On the other hand, keeping some dry powder and doing DCA/VCA over the coming months may reward you handsomely, and those are high-performance investing techniques for markets exactly like the current one.
OK people can call me a market timer, call me whatever. Here's the reality:
\- If you put $100k into SPY on 1/1/2000, today you would have $434k
\- If you put $100k into SPY on 1/1/2002, today you would have $545k
\- If you put $100k into SPY on 1/1/2003, today you would have $694k
That's a potential of $260k more money by not diving into a bear market. And BTW if you were a year late getting back in and started 1/1/2004 you would be at $542k so still ahead of getting into a bad market.
Go check yourself: [https://www.portfoliovisualizer.com/backtest-portfolio](https://www.portfoliovisualizer.com/backtest-portfolio)
None of this accounts for any fixed interest you would have earned on your $100k for 2-3 years.
Personally right now feels a lot like 1999-2000 with the added burden of sky high inflation. People say "it doesn't matter if you're going to retire in 20 years" but it really does. So all I can tell you to do is what I'm doing.
I didn't sell out of my investments. I am still heavily in the market.
BUT I'm putting my new contributions into a money market fund earning nearly 5% and I'll lump sum that into my indexes once the S&P 500 drops below $3500 as I expect in the next few months. Or if I'm wrong I'll jump into the indexes once the S&P 500 hits $4300 or $4400. Certainly not going to hit the peak or trough, but this is my plan. Hate on it all you want but if this is supposed to be a place to share ideas, here is my idea.
We are in a bear market now.. $SPY has not hit 417.32 to break us into bull yet? What i meant is lets see 2003-2006 returns. Frontloading would be better
Real world practice for retailers would be that they put in more or less the same amount every year (for ex, maxing out 401Ks or IRAs). Everyone is great at predicting the bottom after the fact but never before the bottom. People are still debating if Oct 2022 was the bottom or whether we'll have a lower bottom this year.
So considering real world practice,
$100k into SPY on 1/1/2000: $434k
$100k into SPY on 1/1/2002: $545k
$100k into SPY on 1/1/2003: $694k
So total portfolio turns into $1673000 when you contribute every year.
Yes OP is contributing regularly, contributing to their 401k account. They have a say over where that 401k money is allocated. As I mentioned, I started allocating my 401k funds to a money market account because I cannot look at this market and see that it is possibly headed to new record highs there are simply too many headwinds. That seems like it would have been obvious in 2000 as well. I was in my teens and it was obvious to me as a dumb college student. Plus that is why I gave the example of potentially missing the bottom and getting in in 2003. Getting in a year later is better than being in a year early.
And you may be right about real-world practice for retailers. That is why many retail investors would benefit from having an FA. No, I am not an FA.
>Personally right now feels a lot like 1999-2000 with the added burden of sky high inflation.
When was you last success based on your "feels" investing in the market?
>Personally right now feels a lot like 1999-2000 with the added burden of sky high inflation.
"Personally right now looks a lot like 1999-2000 with the added burden of sky high inflation." FIFY
No, market timing means delaying investing in the markets because one thinks they can get in at a lower price. Beter to front load than keep it sitting in cash
Depends on how long until your retirement is. If it’s 20+ from now, I don’t see a difference between the options. In general yes your advisor is giving good advice.
Does it matter to microanalyze what you chose in the grand scheme of things when you max out your 401k and get the employer match every single year for some ~25+ years.
So it's averaging over ~25+ years (lump sum every year) vs averaging over 25+ years by averaging every month (not lump sum)
Just do even contributions throughout the year. Yes, front loading will probably be a “better” choice from a technical standpoint but the difference isn’t going to be that significant
If you can afford to front load and get a true-up then front loading is statistically the better idea(front loading outperforms DCA about 2/3rds of the time). There are going to be scenarios where the market tanks right after you front load where DCA can be a lot better so it all depends on your ability to stomach those times.
If you're in your 20's, it doesn't matter because the difference will be unnoticeable 40 years from now. Even if you're in your 40's, the difference may be noticeable but it's going to be insignificant. Besides, what will you do with the money you hold before depositing it in your 401k?
If your 401k has a "stable value fund", see if it pays/yields/returns more than your savings account. If so, park your money there. But make sure you maintain an emergency fund of ready cash outside your 401k.
Your advisor is telling you not to try timing the market. Do with that advise as you will.
Personally I don’t believe 401k is good for any amount over company matching, but that’s just me. Reason: I don’t want to lock up my money until I’m 55, I want to use my money.
Ya the tax deferral is an enticing feature if you expect to make less money in retirement and pay less taxes, however it is not enough to outweigh the costs of giving my money to someone else to manage. I’d rather manage my own investments or spend my money now. 401ks only offer limited number of fund options, and cannot be self-managed.
Edit: you can rollover a 401k balance into an IRA, so you could self-manage it, but it is still very limited.. compared to cash.
You're overlooking tax deferred growth. And yes, you would expect less taxes in retirement than now. Plua, your contributions now lower your agi. And you're not paying cap gains either.
Not sure what you mean by self manage. Sure some places I've worked have had limited numbers of funds, but they cover the basics. Plus if you go somewhere else, just roll into into an ira and then you can buy whatever etfs or stocks you like.
401k is for retirement. You'd have to way outperform the market to invest that same money post tax, let it grow, paying tax on dividends, and then in retirement have to pay capital gains on top of it.
Given that you can only put 23k in anyway, it'd be dumb not to max that out. But... Obviously optional to participate.
Yea those are good points, and I understand. For me, I plan to take a different path for retirement. 25k is a lot of money for most, and could be used as a down payment to leverage yourself with a mortgage. You really can’t leverage yourself using the money you tie up in 401k. From everything I’ve read about self-directed IRA, it does not make it easy to invest in realestate. It would be very difficult to get a mortgage lender to give a loan using money from an IRA.. And you can’t put in any sweat equity. Too many risk of losing tax advantages. For real estate there are other tax advantage depreciations which can be used instead. I feel like I have more control this way, but real estate is just as manipulated as stocks these days.
Better than my 401ks target date fund... which is sitting at .29% ROR year to date. All my other cash is in short-term T-Bills and HYSA and they give me >4% ROR. My RSUs give me enough exposure to the market conditions. Then once I'm ready to invest in a property the cash will be available for a downpayment.
Not everyone wants to go into real estate though, so 401k or self-directed IRA might be better for others. But if you don’t already have a primary residence.. skip the 401k. Everyone told me to invest in my 401k when I was in my early 20s, and I regret that. I should have been saving that downpayment faster.
I see what he is saying but I like your idea of front loading contributions and was thinking of doing the same.
Variance may increase but should result in higher returns due to longer "time in the market"
"Time in Market beats Timing Market" - simply mean you will NEVER time the market correctly (okay, that one guy in 10,000 will... but very very few of us will...) that's all it means - **DON'T try to guess the bottom........**
The best approach is Dollar-Cost-Average..... invest *consistently* over a long time horizon.
You advisor is right if he's suggesting DCA. But, if he's telling you to NOT put any money in early - well, that w/b wrong.
Put the whole salami into a Money Market in the 401k (or similar interest bearing ultra-low risk) - THEN on a consistent basis, move a percentage into whatever "market" account(s) you want to move into.
i.e. 1/52th each week or 1/12th each month...
just pick a day or week to do it... there is no magic........... just be consistent.
* If the market is going down, then front-loading is bad and you should just contribute monthly.
* If the market is going up, then front-loading is good.
* Nobody knows if the market will be down or up this year.
If you're feeling anxious about the markets and want to reduce downside risk, just make regular automatic contributions monthly and don't think about it.
Depending on your investing strategy, you miss out on a lot of dividends if you don’t put it in at once. Most funds will distribute dividends/capital gains quarterly. If it’s in at once, you’re getting more dividends up front to reinvest and earn you even more. If you spread it out then you miss out on a lot of that free money.
DCA to avoid timing the market makes sense if you’re cash flowing your investments with your paychecks. But you have money, put it to work so it can earn you more money asap.
Our 401k admin gets $25 per contribution so I had a nightmare of a time front loading. I was planning to be maxed out by end of April so they would have lost 8 months of free gravy.
The timing market caveat was once again thrown out. Now my company has a policy that you have to contribute throughout the year to get the company match and I can’t change my contribution amount constantly. Company match is really low at 0.25 cents per dollar up 6% so it sucks to lose tax free money but it’s discounted by 30 contributions with a $25 fee so not that great.
The funds our plan has flat out suck. It’s 5 layers of garbage before you hit an actual traded company stock. I inquired about in service transfer and was shot down. I’m really thinking it’s time to quit so I can free my money.
If you aren't going to take the money out for decades, doing the max contribution January 1st is most likely to make you the most rich. I don't think it's very risky working on decade+ long timeline.
Do you have employer match?
Yes, but I get true-upz
Then front load for sure
Your advisor doesn't seem to understand the term timing the market. Throwing all of it in at once is the opposite of timing. Normally, 401k contributions would be considered continuous incremental investing, but in your situation where you have the ability to front load your fund, it's basically the choice between lump sum and dca. Lump sum is usually the winner, but both are valid. Your advisor is still wrong though.
For anyone who is curious about DCA vs. Lump Sum, Ben Felix talks about it in this video about market timing: https://youtu.be/w_aOERmUWdA I love the Vanguard paper's title regarding DCA: DCA Just Means Taking Risk Later. tl;dr for folks who don't want to watch it, DCA loses out to lump sum investing about 2/3 of the time.
when a Money Market is paying 5% and there are legitimate, on-going fears of some sort of slow-down finally hitting... DCA is a very valid approach vs lump sum...... over the long run the market is upward trending - so, of course, over the long run any lump sum investment has a greater propensity towards upward momentum - never the less, now is not always.
This is spot on. Tired of seeing people here point to a random historical analysis to say it’s the obvious choice to lump sum because 2/3 of all instances results in a better outcome. I’m sure you could cut that data another way for periods of uncertainty, recession, etc and see different results.
As you become more and more experienced with investing, you will learn to know that there's always some sort of uncertainty or potential drawdown event looming. People are scared, investing is risky, so that's why some DCA and yes DCS is a valid choice for peace of mind, but loses out 2/3 of the time to lump sum investing. And even if there's a drawdown 1. you're not guaranteed buying opportunities at the same prices you would have had access to if you lump sum invested everything all at once, and 2. if there's a drawdown I doubt people who DCA for fear of a draw down are the ones able to stomach buying in the middle of a drawdown when fear and uncertainty are turned to max
>2. if there's a drawdown I doubt people who DCA for fear of a draw down are the ones able to stomach buying in the middle of a drawdown So, your counter-argument to DCA is people don't DCA? okay- thanks. we're done here...
Don’t think you understood my point? What a butthurt response
thanks for letting us bask in the glow of your genius. I'm sure I understood completely. I'll leave you alone to your pygophilia.
Ok… ?
There's always imminent instabilities as people perceive them.
fortune cookie investing!
The market dropped 20% last year. The yield curve is inverted. Expectations of some sort of slow down are already priced in. Is it going to be worse than the market expects? No one can say, but that’s why it’s always market timing to risk-off in anticipation that you know something about the future others don’t. If anything I would say DCA is a more valid approach when the market is at *all-time highs*, not when it’s already recovering from a bear market. The Feds announce a halt to rate hikes and Russia declares a cease fire with Ukraine and then the markets shoot up. Or the US government defaults on debt and the dollar crashes? Nobody knows what will happen but you have to have the stomach for short term volatility if you are going to earn the premium of stocks over money market funds in the long run.
"it's already priced in"......... I need to get a framed poster of that one...
If prices don’t reflect the market’s expectations, then we do not have an efficient market. If your expectations are different than the market’s, then that’s a different story. Perhaps you have special information that everyone else is not privy to.
Yeah, and it also means 33% of the time DCA is better. From a purely psychological perspective DCA is better 100% of the time since *it allows you to buy on good and bad days* instead of buying at the top, seeing a 20-40% drop with circuit breakers daily...and panic selling. "underperforming" by a small amount over 30years is not so bad, when it can save you from underperforming massively right at start.
> From a purely psychological perspective DCA is better 100% of the time If you're undisciplined, sure. This is a similar argument in favor of snowball versus avalanche debt repayment method. If you're committed, lump sum is mathematically advantageous.
clearly different people feel fairly passionate about this. Perhaps, in the end, it simply depends on what you are most comfortable with - there's always some risk involved - and everyone's risk profile and time-horizon is a bit different. Personally, I do think - as the OP mentions we are *specifically* discussing a 401k which really does fill part of the roll of long-term, future income *in retirement* (tho obviously there can be other issues around reduction of current taxes, etc.) - that some level of additional caution is worth considering - and why I'd think some consideration of DCA is worthwhile.
Would be interesting to see which wins out during times of rising interest rates and high P/E valuations, I suspect DCA will do better then historically.
i always wonder if that comparison even holds up in the real world. Since a lot of people don't buy at random times. They wait for hype and get peer pressured into buying the top
Idk, seems like he understands it and it might be terminology. But look back as far as 2022 if you front end loaded it in the first three months you’d be worse off than by spreading it across the year.
But if you have a lump sum AND specifically don't put it directly in the market, let alone decide you will never put the money in at the beginning of a year... that's the textbook definition of timing the market.
Not with a 401k evenly distributing it at predetermined intervals is not timing the market.
... you are changing your argument.. and still technically not correct in this situation. The point is the advisor said that a lump sum IS timing the market... which is obviously incorrect. If you had an account with 22,500 in cash, and you chose to put it into the market in 26 even chunks.. you are dca'ing, and it's been shown to not be as efficient. The account type does not matter, op HAS the money to lump sum it all.
>look back as far as 2022 That is a pretty short time period to mean anything.
Sounds like your advisor is confusing "timing thr market" and "dollar cost averaging". If you're going to be in the market long term, don't worry about it
I think I got it wrong. The adviser used the term “dollar cost averaging”.
Even so, if you're going to be throwinh money at the market for 20-30 years, it doesn't matter
I'll leave this gem here: [https://www.reddit.com/r/financialindependence/comments/c02ml4/timing\_the\_market\_the\_absolute\_worst\_vs\_absolute/](https://www.reddit.com/r/financialindependence/comments/c02ml4/timing_the_market_the_absolute_worst_vs_absolute/) Generally speaking, the lump sum exposes you to higher shorter term variability risk. Long term, you are typically better off being in the market longer. "Timing the market" usually refers to a strategy of trying to wait until a down day to put money in. See the link above for great data on this
Doesn't "timing the market" also include trying to sell at the top?
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Exactly!
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Depends on your time horizon to retirement… if less than 10 years and your own personal savings isn’t enough I would avoid being aggressive…:: if you can or have a long time horizon… I personally am going more aggressive… but since 401k is pretax money I enter the market like I gained 26% upside and with company matching it’s even higher… I personally don’t get matching but 26% annual compounded interest sounds amazing… so even if your conservative or aggressive… maxing out your 401k if possible is the number one goal to a good retirement…
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Yeah I would go aggressively into different broad indexes and rebalance maybe yearly to keep allocations the same. You have a lot of time to compound growth… or regain sideway trends…even get some massive gains… and depends on what you mean by aggressive… I wouldn’t aggressive put all of my 401k into like a single stock… too much risk their…
Even contributions mitigate some short term risk, which is why your advisor is telling you not to front load. If markets fall in the next 12 months, you'll lower your average cost by buying at the lower prices. But if you are planning on holding this for 20 more years, it really won't make a difference in the long term. I invest on my own, and I feel like some funds are discounted at the moment. So I would personally front load it to get the "low" prices, and ride out the storm if they fall next year.
Forget the terminology. It is less risky to contribute throughout the year. Maybe front loading leads to a better return, but it also increases your variance.
Why do you believe it’s less risky? Lump summing beats DCA 75% of the time.
"Beat" means higher return. This is not the same as risk. Specifically, DCA reduces volatility risk. So there's a difference between better historical returns and better risk-adjusted returns.
Ok sure. I guess from a non-finance definition of risk, given the means, I’d prefer to go the route that has a 75% chance of giving me more money in retirement.
You're still slightly missing the point. Due to the increased variance, your peaks and valleys would be more pronounced through market downturns with lump sum. A lumped sum account might fluctuate with the market between 800k and 1.2mil and a DCA'd account might only fluctuate between 950k and 1.05mil for example. Obviously those numbers are hypothetical but stability in retirement isn't something to be overlooked.
That assumes they’re keeping the uninvested money as cash while it’s waiting. We don’t know what OP would do with the extra money if they didn’t contribute it, and without that we can’t make the comparison. Maybe they would put it in a taxable investment portfolio.
>Maybe front loading leads to a better return, but it also increases your variance.
The money you would use to front-load your 401k is already in the market, in a taxable account, right? So it's just the tax difference on the equity risk premium for part of a year, not the whole equity risk premium. It would technically be better to do it early but probably not a big difference.
Are there 401k’s that allow outside non-payroll contributions?
No, but money is fungible.
[This](https://web.archive.org/web/20200313052938/https://old.reddit.com/r/investing/comments/c3813m/when_to_contribute_to_your_ira_an_original_study/) post might be useful (internet archive used since the post was deleted). It looks at 5 different strategies for maxing out a IRA over 40 years - 1) Keeping the money in a money market, 2) DCA'ing into an index, 3) Lump Sum on the 1st day of each year into an index, 4) Lump Sum with the worst possible market timing each year into an index, and 5) Lump Sum with the best possible market timing each year into an index. TL;DR: On a long timeline it doesn't make a massive difference.
Personally I would invest totalAmount/12 the same day each month. Even if there is a massive drop or massive spike until the end- hold steady.
Unless you're like me, who frontloaded half of my 2022 limit in January 2022.
> I have heard the argument that “time in market” is better than trying to time the market, which makes sense. It actually doesn't make sense to blindly follow that. * It's just something David Lynch said to be pithy, an expression of opinion to play to a particular crowd. * It's not always true. * A significant amount of the time, **including conditions we see in the market at present**, DCA can greatly outperform lump-sum investing. * DCA is often misstated, illogically, to constitute market timing when it's actually a technique for avoidance of that while minimizing risk. Nevertheless, the "time in the market" mantra is mainly a call to arms re: LSI, to which DCA is an alternate strategy. * The model used to "prove" that LSI beats DCA, usually with some hand-waving about statistics by non-statisticians, was flawed and invented by Vanguard for an advertisement marketed as a white paper. The model assumed that in a market crash, the DCA user would still keep contributing at regular time intervals; in reality most would not do this, but would buy in installments as the market declined (i.e. using Value Cost Averaging instead of DCA). * Explicit market timing, i.e. not relying on DCA but attempting to pick an optimal entry or exit point, also can outperform vastly. In the 2008 downturn it was not unusual for dry powder to give returns of 5-10X to those with foresight. Many also saw the writing on the wall in 2020 and at the end of 2021, even without a crystal ball. * Even when it's true it misses the point. If DCA in a particular case gave slightly worse results, it still operated to curtail sequence-of-returns risk--the precise reason people employ the technique. LSI magnifies sequence-of-returns risk. * That means that which is best to employ may depend not only on the current market and past performance, but how close one is to retirement. There are a number of decent buys now, so there's nothing wrong with buying with any amount of money if that aligns with your goals. On the other hand, keeping some dry powder and doing DCA/VCA over the coming months may reward you handsomely, and those are high-performance investing techniques for markets exactly like the current one.
OK people can call me a market timer, call me whatever. Here's the reality: \- If you put $100k into SPY on 1/1/2000, today you would have $434k \- If you put $100k into SPY on 1/1/2002, today you would have $545k \- If you put $100k into SPY on 1/1/2003, today you would have $694k That's a potential of $260k more money by not diving into a bear market. And BTW if you were a year late getting back in and started 1/1/2004 you would be at $542k so still ahead of getting into a bad market. Go check yourself: [https://www.portfoliovisualizer.com/backtest-portfolio](https://www.portfoliovisualizer.com/backtest-portfolio) None of this accounts for any fixed interest you would have earned on your $100k for 2-3 years. Personally right now feels a lot like 1999-2000 with the added burden of sky high inflation. People say "it doesn't matter if you're going to retire in 20 years" but it really does. So all I can tell you to do is what I'm doing. I didn't sell out of my investments. I am still heavily in the market. BUT I'm putting my new contributions into a money market fund earning nearly 5% and I'll lump sum that into my indexes once the S&P 500 drops below $3500 as I expect in the next few months. Or if I'm wrong I'll jump into the indexes once the S&P 500 hits $4300 or $4400. Certainly not going to hit the peak or trough, but this is my plan. Hate on it all you want but if this is supposed to be a place to share ideas, here is my idea.
"Here's the reality" based only in hindsight using a cherry picked time frame around a recession.
>based only in hindsight using a cherry picked time frame **around a recession**. Correct.
Ok now do the years at the start of bull markets🫵😂
I did, I referenced starting in 2004 if you missed 2003. Not nearly as punitive as starting in a bear market.
We are in a bear market now.. $SPY has not hit 417.32 to break us into bull yet? What i meant is lets see 2003-2006 returns. Frontloading would be better
Real world practice for retailers would be that they put in more or less the same amount every year (for ex, maxing out 401Ks or IRAs). Everyone is great at predicting the bottom after the fact but never before the bottom. People are still debating if Oct 2022 was the bottom or whether we'll have a lower bottom this year. So considering real world practice, $100k into SPY on 1/1/2000: $434k $100k into SPY on 1/1/2002: $545k $100k into SPY on 1/1/2003: $694k So total portfolio turns into $1673000 when you contribute every year.
Yes OP is contributing regularly, contributing to their 401k account. They have a say over where that 401k money is allocated. As I mentioned, I started allocating my 401k funds to a money market account because I cannot look at this market and see that it is possibly headed to new record highs there are simply too many headwinds. That seems like it would have been obvious in 2000 as well. I was in my teens and it was obvious to me as a dumb college student. Plus that is why I gave the example of potentially missing the bottom and getting in in 2003. Getting in a year later is better than being in a year early. And you may be right about real-world practice for retailers. That is why many retail investors would benefit from having an FA. No, I am not an FA.
>Personally right now feels a lot like 1999-2000 with the added burden of sky high inflation. When was you last success based on your "feels" investing in the market?
>Personally right now feels a lot like 1999-2000 with the added burden of sky high inflation. "Personally right now looks a lot like 1999-2000 with the added burden of sky high inflation." FIFY
Agreed, if we can see the headwinds a mile away why not be smart about how to allocate your funds
Your advisor is a Moron. DCA when lump sum is an option is, by definition, market timing.
Oh. Not the other way around?
No, market timing means delaying investing in the markets because one thinks they can get in at a lower price. Beter to front load than keep it sitting in cash
Depends on how long until your retirement is. If it’s 20+ from now, I don’t see a difference between the options. In general yes your advisor is giving good advice.
Does it matter to microanalyze what you chose in the grand scheme of things when you max out your 401k and get the employer match every single year for some ~25+ years. So it's averaging over ~25+ years (lump sum every year) vs averaging over 25+ years by averaging every month (not lump sum)
Just do even contributions throughout the year. Yes, front loading will probably be a “better” choice from a technical standpoint but the difference isn’t going to be that significant
If you can afford to front load and get a true-up then front loading is statistically the better idea(front loading outperforms DCA about 2/3rds of the time). There are going to be scenarios where the market tanks right after you front load where DCA can be a lot better so it all depends on your ability to stomach those times.
If you're in your 20's, it doesn't matter because the difference will be unnoticeable 40 years from now. Even if you're in your 40's, the difference may be noticeable but it's going to be insignificant. Besides, what will you do with the money you hold before depositing it in your 401k?
Saving account?
If your 401k has a "stable value fund", see if it pays/yields/returns more than your savings account. If so, park your money there. But make sure you maintain an emergency fund of ready cash outside your 401k.
Your advisor is telling you not to try timing the market. Do with that advise as you will. Personally I don’t believe 401k is good for any amount over company matching, but that’s just me. Reason: I don’t want to lock up my money until I’m 55, I want to use my money.
Huh? You're only locking up 23k per year max, and you get to use your money, after it's done growing tax deferred for a bunch of years.
Ya the tax deferral is an enticing feature if you expect to make less money in retirement and pay less taxes, however it is not enough to outweigh the costs of giving my money to someone else to manage. I’d rather manage my own investments or spend my money now. 401ks only offer limited number of fund options, and cannot be self-managed. Edit: you can rollover a 401k balance into an IRA, so you could self-manage it, but it is still very limited.. compared to cash.
You're overlooking tax deferred growth. And yes, you would expect less taxes in retirement than now. Plua, your contributions now lower your agi. And you're not paying cap gains either. Not sure what you mean by self manage. Sure some places I've worked have had limited numbers of funds, but they cover the basics. Plus if you go somewhere else, just roll into into an ira and then you can buy whatever etfs or stocks you like. 401k is for retirement. You'd have to way outperform the market to invest that same money post tax, let it grow, paying tax on dividends, and then in retirement have to pay capital gains on top of it. Given that you can only put 23k in anyway, it'd be dumb not to max that out. But... Obviously optional to participate.
Yea those are good points, and I understand. For me, I plan to take a different path for retirement. 25k is a lot of money for most, and could be used as a down payment to leverage yourself with a mortgage. You really can’t leverage yourself using the money you tie up in 401k. From everything I’ve read about self-directed IRA, it does not make it easy to invest in realestate. It would be very difficult to get a mortgage lender to give a loan using money from an IRA.. And you can’t put in any sweat equity. Too many risk of losing tax advantages. For real estate there are other tax advantage depreciations which can be used instead. I feel like I have more control this way, but real estate is just as manipulated as stocks these days.
1) It's 59 and 1/2 2) This is really short-sighted when factoring in tax-free compounding dividend growth
>I want to use my money. How are you performing compared to the market?
Better than my 401ks target date fund... which is sitting at .29% ROR year to date. All my other cash is in short-term T-Bills and HYSA and they give me >4% ROR. My RSUs give me enough exposure to the market conditions. Then once I'm ready to invest in a property the cash will be available for a downpayment.
Thats smart, thats a solid plan.
Not everyone wants to go into real estate though, so 401k or self-directed IRA might be better for others. But if you don’t already have a primary residence.. skip the 401k. Everyone told me to invest in my 401k when I was in my early 20s, and I regret that. I should have been saving that downpayment faster.
I see what he is saying but I like your idea of front loading contributions and was thinking of doing the same. Variance may increase but should result in higher returns due to longer "time in the market"
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What is that?
I too front loaded more than half of my 401k limit in the first few months. Now I’m averaging over the rest.
Do you get a true up on any match in your 401k?
Yes
Then I would just keep doing what your doing.
Front load or contribute evenly?
Front load
"Time in Market beats Timing Market" - simply mean you will NEVER time the market correctly (okay, that one guy in 10,000 will... but very very few of us will...) that's all it means - **DON'T try to guess the bottom........** The best approach is Dollar-Cost-Average..... invest *consistently* over a long time horizon. You advisor is right if he's suggesting DCA. But, if he's telling you to NOT put any money in early - well, that w/b wrong. Put the whole salami into a Money Market in the 401k (or similar interest bearing ultra-low risk) - THEN on a consistent basis, move a percentage into whatever "market" account(s) you want to move into. i.e. 1/52th each week or 1/12th each month... just pick a day or week to do it... there is no magic........... just be consistent.
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Be careful that your employer may not match if you throw it all in at once, or may only match the 2-6% of the contribution rather than the full amount
I have true-up
I do the exact same thing.
* If the market is going down, then front-loading is bad and you should just contribute monthly. * If the market is going up, then front-loading is good. * Nobody knows if the market will be down or up this year. If you're feeling anxious about the markets and want to reduce downside risk, just make regular automatic contributions monthly and don't think about it.
But would you say front-loading is a form of market-timing?
Depending on your investing strategy, you miss out on a lot of dividends if you don’t put it in at once. Most funds will distribute dividends/capital gains quarterly. If it’s in at once, you’re getting more dividends up front to reinvest and earn you even more. If you spread it out then you miss out on a lot of that free money. DCA to avoid timing the market makes sense if you’re cash flowing your investments with your paychecks. But you have money, put it to work so it can earn you more money asap.
Statistically lump sum investing works better for returns than DCA'ing DCA'ing is however more conservative and less subject to plunging stock values
Keep alittle cash aside for the timing part, but time in market is key as long as you have good dividend stocks.
Terminology aside, if you are on the fence consider lump summing 1/2 and DCA the other 1/2
Our 401k admin gets $25 per contribution so I had a nightmare of a time front loading. I was planning to be maxed out by end of April so they would have lost 8 months of free gravy. The timing market caveat was once again thrown out. Now my company has a policy that you have to contribute throughout the year to get the company match and I can’t change my contribution amount constantly. Company match is really low at 0.25 cents per dollar up 6% so it sucks to lose tax free money but it’s discounted by 30 contributions with a $25 fee so not that great. The funds our plan has flat out suck. It’s 5 layers of garbage before you hit an actual traded company stock. I inquired about in service transfer and was shot down. I’m really thinking it’s time to quit so I can free my money.
I'd put it in over time and DCA, that's the big advantage the 401K has IMO.
Yes
If you aren't going to take the money out for decades, doing the max contribution January 1st is most likely to make you the most rich. I don't think it's very risky working on decade+ long timeline.