Dollar cost averaging for $200,000

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asmithers
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Dollar cost averaging for $200,000

Post by asmithers »

I saved a bunch of cash preparing for my daughter to go to medical school. That has been delayed and now I'm concerned that inflation will chew up a lot of value. So I've come to terms that I need to invest the money in something other than a savings account. My question is, should I invest in smaller chunks, over time, to approximate dollar cost averaging, or what? I also wouldn't mind some advice on a lower risk (realizing lower potential gain) investment options with a 2 year time window. I'm following the BH formula with my 401K it's rocking. Thanks in advance.
Marseille07
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Re: Dollar cost averaging for $200,000

Post by Marseille07 »

If you need the money in 2 years, I am not sure if you should invest the money at all. Are you going to be OK if the value has gone down?
alex_686
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Re: Dollar cost averaging for $200,000

Post by alex_686 »

Lump sum investing is the rational answer. You have figured out what your optimal asset allocation is. You should move immediately to it. There is not mathematically logically way tp specify market expectation, risk tolerances and goals where Dollar Cost Averaging (DCA) makes sense. This is what I urge.

If you feel concerns about high markets, inflation, or just are a risk adverse investor then structure your asset allocation now. Having money in cash today and in something else in a year from now is not going to really help. A big crash may come in the next year or 2. Or Next 5. Or in the next year and 5 years from now. Having a crash this year does not lower the chance of having a crash the next.

You can make the case for DCA from a emotional viewpoint using Behavioral Economics. What if the market were to fall right after you invested? Well, there is no way you could tell. And you might miss a huge boom. Or maybe the market blow up just after you finished dollar cost averaging. Rationally speaking you know you can't know the future and these are just the hazards of investing. Expect that you would feel a huge negative emotional hit, you would feel discourage, and would be disinclined to invest in the future. Totally irrational but real feelings.

And with that I leave it up to you to decided.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
wolf359
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Re: Dollar cost averaging for $200,000

Post by wolf359 »

Investing for 2 years is too risky. The risk of loss exceeds the benefit from potential gains.

Besides, the issue is not inflation, since you have allocated the entire amount towards this one known expense. The issue is the possibility of the tuition going up (inflation of this specific expense.) Is that likely? Does the medical school change its rates very frequently?

Your best course of action is a bond or a CD for the time period you need it.

You should only invest if you can afford to lose the amount you're investing. Unless you're willing to tell your daughter "Sorry, I lost your tuition," you don't have the time to invest and recoup potential losses.
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arcticpineapplecorp.
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Re: Dollar cost averaging for $200,000

Post by arcticpineapplecorp. »

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A Random Fellow
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Re: Dollar cost averaging for $200,000

Post by A Random Fellow »

I'd buy $20k of I Bonds today (10k for you and 10k for your daughter) and 20k more on January 1. The rest should be invested pretty conservatively given the time horizon. Others may have better ideas, but I wouldn't go more than 20/80 stocks and bonds.

So my suggestion:

1) 40k I Bonds
2) 32k VT or VTI
3) 128k BND or similar

That should help shield inflation concerns at least. You could also do 10/90 stocks and bonds if you want to play a little safer.
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JoeRetire
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Re: Dollar cost averaging for $200,000

Post by JoeRetire »

asmithers wrote: Tue Oct 26, 2021 11:30 amMy question is, should I invest in smaller chunks, over time, to approximate dollar cost averaging, or what?
Lump sum.
I also wouldn't mind some advice on a lower risk (realizing lower potential gain) investment options with a 2 year time window.
For a short-term period (2 year time frame) use only safe assets.
Consider CDs.
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Marseille07
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Re: Dollar cost averaging for $200,000

Post by Marseille07 »

alex_686 wrote: Tue Oct 26, 2021 11:41 am Lump sum investing is the rational answer. You have figured out what your optimal asset allocation is. You should move immediately to it. There is not mathematically logically way tp specify market expectation, risk tolerances and goals where Dollar Cost Averaging (DCA) makes sense. This is what I urge.

If you feel concerns about high markets, inflation, or just are a risk adverse investor then structure your asset allocation now. Having money in cash today and in something else in a year from now is not going to really help. A big crash may come in the next year or 2. Or Next 5. Or in the next year and 5 years from now. Having a crash this year does not lower the chance of having a crash the next.

You can make the case for DCA from a emotional viewpoint using Behavioral Economics. What if the market were to fall right after you invested? Well, there is no way you could tell. And you might miss a huge boom. Or maybe the market blow up just after you finished dollar cost averaging. Rationally speaking you know you can't know the future and these are just the hazards of investing. Expect that you would feel a huge negative emotional hit, you would feel discourage, and would be disinclined to invest in the future. Totally irrational but real feelings.

And with that I leave it up to you to decided.
Did you really read the OP? This is their daughter's medical school fund they need in 2 years. Lump summing this kind of money into the market is out of the question in my opinion.
sizzlefuzz
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Re: Dollar cost averaging for $200,000

Post by sizzlefuzz »

I think the combination of I Bonds and a jumbo CD would be the ideal piece in this case. Additionally, you may find it easier to just get a jumbo CD to not have to deal with Treasury Direct (I have heard it can be a pain to work with).
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alex_686
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Re: Dollar cost averaging for $200,000

Post by alex_686 »

Marseille07 wrote: Tue Oct 26, 2021 11:56 am Did you really read the OP? This is their daughter's medical school fund they need in 2 years. Lump summing this kind of money into the market is out of the question in my opinion.
I did miss the critical fact. Thanks for pointing it out.

I will stand by what I said. DOC never makes rational sense no matter what the time frame is. Short or long. Low risk verse high risk. It is never the rational choice.

If we really want to focus on that goal, well - risk and return are linked. There are few to none safe options if you want to protect 200k from inflation. Bonds, bond funds, TIPs, CDs, etc.

There are still lots of options. I can make the case for risky equity investments. I really want to segue into the cognitive error of Mental Accounting if we really want to zoom out. The correct way of doing this is to integrate the OPs various goals together.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
shess
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Re: Dollar cost averaging for $200,000

Post by shess »

asmithers wrote: Tue Oct 26, 2021 11:30 am I saved a bunch of cash preparing for my daughter to go to medical school. That has been delayed and now I'm concerned that inflation will chew up a lot of value. So I've come to terms that I need to invest the money in something other than a savings account. My question is, should I invest in smaller chunks, over time, to approximate dollar cost averaging, or what? I also wouldn't mind some advice on a lower risk (realizing lower potential gain) investment options with a 2 year time window. I'm following the BH formula with my 401K it's rocking. Thanks in advance.
The VTI total-market index is up over 35% in the past year, 116% over 5 years (16.4% year-on-year), and 307% since inception in 2001 (7.3% year-on-year). How you convert a 35% short-term return into a 7.3% long-term return is NOT by simply receiving 7.3% in the years when 35% is not on offer. It could happen with a long stretch of very low but positive returns, but more frequently it happens with a shorter stretch of negative returns.

The future will not be the same as the past, and really anything can happen. But I'd be real nervous about investing money with the expectation that the next couple years of stock-market returns to look like the past year, rather than looking more like 2008 or 2001. We have more than enough portfolio to support paying for our kids' college (one in college, the other starts next year), but I still have their 529 plans in safer investments.

You could use Vanguard Target Enrollment 2020/2021 Portfolio as a model:
https://investor.vanguard.com/529-plan/profile/4660
Obviously, if the funds aren't in a Vanguard 529, you can't use that precise portfolio. But all of their 529 portfolios are wrappers around underlying assets which can be accessed as retail Vanguard funds. I'm not really saying that I think this is the RIGHT model, I'm just saying that it is a model suggested by a group with access to lots of information and a high incentive not to be super wrong about it. So it makes a reasonable baseline to evaluate anything else you do against.

---

WRT the suggestions about getting a CD, I'd evaluate whether you know for certain when you'll need to start paying the costs. If you have a specific date nailed down, then the CD is easy. If it's less certain, you could split between 4 $50k CDs, so that if you have to break the CD to get earlier access than expected, you only have to break part of the total.

All of that said, CD rates aren't super amazing relative to HYSA rates. A local credit union is showing 0.6% for a 2-year CD, 0.55% for a 1-year CD, and 0.5% for a HYSA. 0.1% on $200k is $200/year. I like having $200/year, but that's not going to change decisions like which school to go to, etc. Some banks like Ally also have a "no penalty" CD, which locks up the rate for 11 months but can be cashed out with no penalty after a week, so it's basically like a HYSA which is locked in for 11 months.
Topic Author
asmithers
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Re: Dollar cost averaging for $200,000

Post by asmithers »

Thanks for the advice. I'd be happy with a 4% annual return if the risk was minimal. I guess a lot of people would want that, which is probably why it's elusive.
Topic Author
asmithers
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Re: Dollar cost averaging for $200,000

Post by asmithers »

arcticpineapplecorp. wrote: Tue Oct 26, 2021 11:51 am lump sum...in a 2 year CD.

https://www.bankrate.com/banking/cds/be ... -cd-rates/
The best rate I saw was 0.75%. I'm not very excited about having my money tied up for 2 years in order to make $1500
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arcticpineapplecorp.
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Re: Dollar cost averaging for $200,000

Post by arcticpineapplecorp. »

asmithers wrote: Tue Oct 26, 2021 6:12 pm
arcticpineapplecorp. wrote: Tue Oct 26, 2021 11:51 am lump sum...in a 2 year CD.

https://www.bankrate.com/banking/cds/be ... -cd-rates/
The best rate I saw was 0.75%. I'm not very excited about having my money tied up for 2 years in order to make $1500
Well if you want to make more you have to take more risk. How much risk can you take and what if you lose money and it does not recover by the time you need it? These are the questions you must ask yourself.
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fortunefavored
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Re: Dollar cost averaging for $200,000

Post by fortunefavored »

asmithers wrote: Tue Oct 26, 2021 6:12 pm
arcticpineapplecorp. wrote: Tue Oct 26, 2021 11:51 am lump sum...in a 2 year CD.

https://www.bankrate.com/banking/cds/be ... -cd-rates/
The best rate I saw was 0.75%. I'm not very excited about having my money tied up for 2 years in order to make $1500
If it goes from $200K to $100K and stays there for 5 or 10 years.. does it matter? Maybe you can cash flow the rest or sell a vacation home or ask grandma/grandpa...

That's all it really comes down to. Otherwise, you take your .75% and swallow hard. :)
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Alto Astral
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Re: Dollar cost averaging for $200,000

Post by Alto Astral »

asmithers wrote: Tue Oct 26, 2021 6:06 pm Thanks for the advice. I'd be happy with a 4% annual return if the risk was minimal. I guess a lot of people would want that, which is probably why it's elusive.
Ibonds can give close to that: 3.54% now. It may reduce but you won’t lose your capital. You did not mention spouse but you could invest 10k each for a total of 30k (you+spouse+daughter). Then 10k each in a trust tied to each. This is 60k. Repeat in Jan 2022. Now you have $120k in iBonds that will be available from Jan 2023 onwards. Repeat for another 60K in Jan 2023 and it will be available in Jan 2024. If these timelines work, you could have $180k invested in a very safe instrument.
shess
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Re: Dollar cost averaging for $200,000

Post by shess »

asmithers wrote: Tue Oct 26, 2021 6:12 pm
arcticpineapplecorp. wrote: Tue Oct 26, 2021 11:51 am lump sum...in a 2 year CD.

https://www.bankrate.com/banking/cds/be ... -cd-rates/
The best rate I saw was 0.75%. I'm not very excited about having my money tied up for 2 years in order to make $1500
$1500 is not that exciting compared to, say, $15,000, but I think having the same $200k available for med school in 2 years is pretty exciting. Certainly more exciting than having only $150k available for med school. I doubt they'll be giving out discounts if the markets don't do well.
Topic Author
asmithers
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Re: Dollar cost averaging for $200,000

Post by asmithers »

Thanks to all your feedback, I don't feel like I've made a mistake sitting on the money, which I was thinking. I'll go with the CD. Thanks again
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arcticpineapplecorp.
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Re: Dollar cost averaging for $200,000

Post by arcticpineapplecorp. »

Alto Astral wrote: Tue Oct 26, 2021 7:33 pm
asmithers wrote: Tue Oct 26, 2021 6:06 pm Thanks for the advice. I'd be happy with a 4% annual return if the risk was minimal. I guess a lot of people would want that, which is probably why it's elusive.
Ibonds can give close to that: 3.54% now. It may reduce but you won’t lose your capital. You did not mention spouse but you could invest 10k each for a total of 30k (you+spouse+daughter). Then 10k each in a trust tied to each. This is 60k. Repeat in Jan 2022. Now you have $120k in iBonds that will be available from Jan 2023 onwards. Repeat for another 60K in Jan 2023 and it will be available in Jan 2024. If these timelines work, you could have $180k invested in a very safe instrument.
but he needs the money in 2 years and since there's a 1 year holding period without forfeiture of three months interest, this plan won't work for the short term. long term, it's a fine plan.
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Alto Astral
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Re: Dollar cost averaging for $200,000

Post by Alto Astral »

arcticpineapplecorp. wrote: Tue Oct 26, 2021 9:01 pm
Alto Astral wrote: Tue Oct 26, 2021 7:33 pm
asmithers wrote: Tue Oct 26, 2021 6:06 pm Thanks for the advice. I'd be happy with a 4% annual return if the risk was minimal. I guess a lot of people would want that, which is probably why it's elusive.
Ibonds can give close to that: 3.54% now. It may reduce but you won’t lose your capital. You did not mention spouse but you could invest 10k each for a total of 30k (you+spouse+daughter). Then 10k each in a trust tied to each. This is 60k. Repeat in Jan 2022. Now you have $120k in iBonds that will be available from Jan 2023 onwards. Repeat for another 60K in Jan 2023 and it will be available in Jan 2024. If these timelines work, you could have $180k invested in a very safe instrument.
but he needs the money in 2 years and since there's a 1 year holding period without forfeiture of three months interest, this plan won't work for the short term. long term, it's a fine plan.
If they start this month, won't they finish the 1 year holding period like so? They would have the interest in 27 months (3 months over but pretty close)

Code: Select all

Amount	Invest	Withdraw	Months from today	
60k	Oct-21	Oct-22		12
60k	Jan-22	Jan-23		15
60k	Jan-23	Jan-24		27
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arcticpineapplecorp.
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Re: Dollar cost averaging for $200,000

Post by arcticpineapplecorp. »

Alto Astral wrote: Tue Oct 26, 2021 9:12 pm
arcticpineapplecorp. wrote: Tue Oct 26, 2021 9:01 pm
Alto Astral wrote: Tue Oct 26, 2021 7:33 pm
asmithers wrote: Tue Oct 26, 2021 6:06 pm Thanks for the advice. I'd be happy with a 4% annual return if the risk was minimal. I guess a lot of people would want that, which is probably why it's elusive.
Ibonds can give close to that: 3.54% now. It may reduce but you won’t lose your capital. You did not mention spouse but you could invest 10k each for a total of 30k (you+spouse+daughter). Then 10k each in a trust tied to each. This is 60k. Repeat in Jan 2022. Now you have $120k in iBonds that will be available from Jan 2023 onwards. Repeat for another 60K in Jan 2023 and it will be available in Jan 2024. If these timelines work, you could have $180k invested in a very safe instrument.
but he needs the money in 2 years and since there's a 1 year holding period without forfeiture of three months interest, this plan won't work for the short term. long term, it's a fine plan.
If they start this month, won't they finish the 1 year holding period like so? They would have the interest in 27 months (3 months over but pretty close)

Code: Select all

Amount	Invest	Withdraw	Months from today	
60k	Oct-21	Oct-22		12
60k	Jan-22	Jan-23		15
60k	Jan-23	Jan-24		27
oh, thought it was $30k a year.

you also have $30k in a trust tied to each for $60k a year.

didn't realize this exception to the $10k limit (plus tax refund). See it now:

https://thefinancebuff.com/buy-more-i-b ... trust.html

that's the first I've seen this. I haven't seen anyone talk about this at bogleheads unless it just went over my head.

that would accomplish said goal (though OP says "within 2 years", so we don't really know what month s/he'd have to cash out).
Last edited by arcticpineapplecorp. on Tue Oct 26, 2021 9:23 pm, edited 1 time in total.
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TexasBorn
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Re: Dollar cost averaging for $200,000

Post by TexasBorn »

I know OP already mentioned they’re going with a CD,so this is moot…but…

How long is med school? 4,6,8 years?

Should all monies for the entire spending period be waiting in cash?

Or wouldn’t you treat it like a mini retirement and have say the first two years sitting in cash, but invest the remainder very cautiously ….cashing out maybe every 6 months to keep 2 years worth of monies on hand as money is spent each semester…

Just something to consider or ponder. The time period is longer than 2 years, right?
Activesloth
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Re: Dollar cost averaging for $200,000

Post by Activesloth »

My wife and I both went to med school. We thought our daughter was going too. We had a scholarship ready. Then, right in the middle of pre-med, she changed her mind and said “I’m not doing this.” You have to know why she’s delaying. Some people just want to gallivant before going to med school, but they really want it. Some are just keeping their parent’s hopes up because dad already saved for med school. Maybe she just wants to do something else.
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Re: Dollar cost averaging for $200,000

Post by bugleheadd »

TSLA $1100 calls 11/5 exp

j/k
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retiredjg
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Re: Dollar cost averaging for $200,000

Post by retiredjg »

You said that med school was "delayed" and the money might be needed in two years. Money need in two years should not be invested in stocks at all and maybe not in bonds either.

High yield savings and CDs. If you absolutely must "invest" in something, put some (not all) a short term bond fund, tax-exempt if you are in a high tax bracket.
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