What If The Market Crashes? Lump Sum vs Dollar Cost Averaging
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- Опубликовано: 2 июн 2024
- Markets have had a bit of a wobble recently and with US valuations so high I often hear from people that they are worried about investing large amounts of money given the current environment. So is it better to invest all your money in one lump sum or to dip feed (Dollar Cost Average) your money over a period of time just in case markets fall? In this video, we’ll look at which strategy performs best, how things change if you are risk averse, how long to space out your investments if you decide to drip feed and ways of overcoming the fear of investing.
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Timestamps
00:00 Introduction
00:47 Lump Sum or Drip Feed? Which Performs Best?
05:32 What if I’m Scared of Losing Money?
11:22 How Long To Drip Feed For?
13:06 Ways To Overcome Your Fear of Investing
16:54 Summary
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Just proves the age-old adage of " its time in the stock market, not timing the stock market"
Great video Ramin. I got caught out in both scenarios. Put in a lump sum and markets crashed 2022. Then in 2023 held a lump sum back to drip feed and markets went up.
Have now decided to lump sum regardless. Having seen my investments recover after the crash I'm not concerned about falls and it doesn't make much difference in the long term. I think it's good experience to live through a crash as it "toughens you up" for the next time and doesn't stress you out!
Money market fund pays 5.2%. One can go lump sum there, and then slowly switch the money to equities over a period of time
Trading 212 pays the same. I put lumpy amounts with them + drip feed into an ISA. Bit worried about the US/high prices... but no crystal ball 😊
This thinking is exactly what gets people into trouble. People smarter than you are likely doing this already and you'll be late to the game.
Yep, that's how I do it. Then favour my drip feed towards whichever fund in my portfolio has performed worst, thus rebalancing constantly without having to sell or suffer the spread.
Of course, we're all assuming markets going up, but over 30 years, I'm confident enough.
@@xvx4848 The smart people are those taking a cut of your investments, regardless of how the stock market performs.
Yes, that is one way. But more fundamentally if you are uncomfortable lump summing it in then you need to reexamine your target asset allocation as you will only have larger amounts invested in the same asset allocation in the futute
One thing that eased my worries around investing was adding to a SIPP, even if it crashed tax relief would compensate for a lot of that.
I agree. I had some bad ISA investments made before discovering Ramin which I sold at a loss and reinvested in pension with 40% relief and more than recovered my losses immediately.
DCA all year round and lump sum when it crashes.
That's exactly what I did! Lump sum just before a crash. So next time DCA just before a rally! But still happy with performance to date.
You seem to be very confident in your ability to predict crashes. If that’s true why DCA at all?
If you have inherited a lump sum its equally important to consider taxation. Inheritance, capital gains and income. In the event the sum is so large you cannot protect using the usual UK wrappers, considering gifting it (all or in part) to dependents. In you live for 7 years afterwards, there will be no extra inheritance tax liability on the sum. If you make a deed of variation within 2 years of the deceased death date, then the liability is immediately negated
Absolutely! This is becoming more and more important with fiscal drag as thresholds are not being increased.
Really good point
Always appreciate your videos.
I appreciate that! @krisnah7
I had a pension transfer lumpsum to invest in October last year. I took the cautious approach and initially only invested about 25% of the money and planned to invest the remaining money over the next year or so. Bad decision...I missed out on maybe £100k of potential gains with the market rally, but hindsight is a wonderful thing...if it had crashed I would have been laughing!
Another fantastic video. Thanks Ramin!
Thanks @Nousmourronsseuls
Many of these align with my intuition. Thanks for speaking it out logically
You're welcome @Kenzag454
Excellent video Ramin! Thank you. Can you please do a video on comparing all these different Robo advisors and Weather they do better over to fund or three fund strategy overtime?
Very useful. Many thanks for your advice!
Glad it was helpful! @workinprogresssince1974
Thankyou Ramin for your valuable insight and I have subscribed.
You are so welcome @rajshu6408
Thank you for making this video. I have been deliberating for a while as to which method is best, and this helped me decide!
very nice video and very helpful. Thanks
I have tended now to do a small initial lump sum, and then a small monthly input. If markets are low, I up the amounts, and if markets are high I keep it at the minumum, or sometimes pause it for a bit once the allocation reaches the amount I wanted. I also like the drip feed, as it lets you forget about it. I have been badly burnt by trying to swing trade (with tech), so am now much more cautious!
Great video! What global index fund have you chosen to invest in?
Another great video for the same old topic. Keep them coming, Ramin!
Thanks, will do! @MartinoBagini
I think most of us can’t lump sum in and have to drip feed each month when we get paid.
Great video as always Ramin. Many thanks.
Glad you enjoyed it @JohninRosc
My mom got a lumpsum when she retired and I worried about it. Invested only 5% of what she got in the first month and it rose by 7-8% by the end of the month. Lumpsum might be a better strategy in a bull market.
Another brilliant video Ramin.
For a SIPP would you go developed world or all world?
Thank you Ramin as always for your thoughtful analysis.
Thanks for listening @jon34153
I was just thinking about investing lump sump or cost avg, You read my mind. But market ATH is the drop likely soon ??
Really useful information, Ramin. Thanks for sharing.
You're welcome @TheCompoundingInvestor
Great video. So many people you encounter are convinced that "dollar cost averaging" is the way forward, but it only is if you're trying to get over the psychological barrier of lump sum investing.
Thanks for sharing! @thorpeeedo
I learnt my lesson last year.
I held back investing approximately £150,000 and lost out on a 15% yearly return.
This has now been added to my portfolio and invested into equites.
I did similar but didn't hold off for the whole year so did benefit from some returns.
I think you shouldn't be investing in equities if you have a short time horizon ie less than 5 years. If longer it really won't make much difference whether you lump sum or DCA.
And what happens if there's a crash just after you invest the final installment of your drip feed?!
Another excellent video Ramin! I wish I could speak so eloquently and with such authority! Very helpful, thank you 👍
Glad you enjoyed it! @synthboffin
Thank you for being awesome
Thank you @goodq for being generous! Ramin
Thank you so much for sharing a very important and helpful trading video with us
Glad it was helpful! @user-wr7nl3yt1e
I dollar cost average everyday, works for me. But I do increase payments when market drops.
Great video, congratulations! It answers a lot of common questions and helps many investors to overcome their fear. Many thanks for your fine job.
Glad you enjoyed it @AlessandroBottoni
Great video
Thanks @christoph8429
I wonder if a lump sum investing over 3 or 6 months in each year, which months are the best?
3:33 Nice...
What global fund are you invested in ramin? I heavily biased to S&P and vanguard LS80/20 and am looking to diversify most of my holding into global/all world tracker on vanguard
Thanks for this, just what i needed to hear.
Glad it was helpful! @craigsharples5568
Hi. Great video by the way. I am new to investing and have opted for the Freetrade platform but I am having doubts about the fees. I have heard these fees are very expensive to other platforms so can I ask why do you use this platform when there are platforms offering a better deal? Thanks
You should look at the trend to know whether to drip feed or lump sum. Lump sum if the market is in an uptrend during a pull back. In a downtrend or sideways action, drip feed so you can always take advantage of lower prices.
Easily one of the best channels on retirement and financial planning. And as always, thank you for speaking, Ramin!
Glad you think so! @jon34153
I switched funds at the beginning of the year between vanguard 80 20 lifestrategy and VHVG and it was the most stressful few days ever! Value wise it was 200k+ and i wasn’t sure whether to sell and buy in one transaction or do it in increments. In the end I did it in 3 or 4 transactions over a week and don’t think I lost out, but boy was it stressy!
I know how you feel…I’ve just moved my ISA from an ifa to diy on iWeb. Couldn’t transfer in specie as my pf was 8 equity funds only available to the ifa so had to cash in. Suddenly having £500k (I’m 62) cash to essentially start again is some responsibility, you want to get it right. Funds cleared about 10 days ago so I’ve spent the last week going back into the market and luckily prices are a bit lower than when I crystallised my original ISA so I went back in with 80% of the funds, simplifying things down into mostly all in one global index tracker and a wee bit in one tech fund for spice… 20% into a couple of mmfs for now just to see how the world pans out over the next few months.
But you’re right, it is very stressy trying to decide the best strategy. For every article I read about the US bubble bursting soon, there’s another forecasting a good rise from here by the end of year.
This is an interesting discussion but in the recent crash, was it two springs ago? I was in cash since I just felt a bit uneasy, an the intuition saved me approx 25% from memory, then I was told by Ray Dalio that “cash was trash” well I had a bit more “trash” in my fund than he would have done. But he is an expert and I am a gardener. What I am getting at is what works works, no professional soldier always uses the same tactic in a battle now do they? There are no hard and fast rules, just keeps your ear to the ground and try to get it right. That’s what I think.
I'm about to turn 40, I've recently sold a house I renovated and felt my £8k workplace pension won't do much for me. So I've decided to take 20k and taper it into a sipp "HSBC all cap" at £1,500 p/m just wondering if the 18 month taper is enough. There is a good chance in a significant crash I would buy double that month but my main concern is should I be aiming to average in over 4yrs say over the 18months I'm doing now.
Id argue that 3 equal payments split over 3 months isnt really drip feeling but lump sum spaced shortly apart.
Market already back to what it was before the dip when this video went live. When it comes to a huge index based etf it doesn't really matter what you do, since returns depend on a very long period of 10+ years.
Also in my opinion the question is kind of illogical to begin with. DCA is a case where people simply invest what they have every month when they receive income. It's not a case of someone keeping hundreds of thousands in the bank as cash just to wait for the "perfect" time to invest everything.
What about the case when you've received unexpected lump sum....or consolodated multiple pensions....its not as black and white as just monthly salary investing.
Do people actually watch Ramin's videos or do they just post comments, responding to the title? I find it very odd.
@@jam99 probably commented before it was covered in the vid.
What about if you're looking at that S&P500 but investing from and denominated in GBP, CAD, or JPY?
Try VUAG
Hello Ramin, how are you doing? Great video (as per). I have an unusual method of investing at the moment - I use CNN's greed index and invest heavily when we're in fear/extreme fear, and tend to keep away when we're in the greed/extreme greed range. The idea is to adopt Warren Buffet's 'greedy when everyone's fearful' strategy. Didn't get much added over the past six months but I did take advantage of the brief fall a couple of weeks ago. Take care and best wishes.
Looked at statistically, the numbers presented here are correct, but only when investors don't react to a market crash. If you could DCA from where we are today and then invest substantially after the inevitable market crash, you should beat the scenarios presented here. Of course investing immediately after a crash is hard to do emotionally and you do best if you can figure out where the bottom is, which again can be difficult.
I prefer lump sum because what else would I do with my money.
Spend it
I agree with everything.
However in the current scenario (on my opinion overvalued) drip feeding would be more sensible probably.
You're assuming there's going to be a crash? How do you know? And when's it going to be?
@shellyperera2010 you're assuming that I'm assuming something that I haven't said.
I said that based on my view now lots of companies are too expensive (it's a fact the the PE is high) and there's more risk to put a lump sum now. Then if you guys think that the market will go up and up forever feel free to ride the wave. I would stay away
@@stex83the market will go up and up forever in the long term. Except of course if there's a nuclear war or asteroid hit etc.
You've said to stay away? How long for? Until the market isn't overvalued I assume? It could stay irrationally over valued for a long time.
@shellyperera2010 what I'm saying is that before putting a lump sum I would put now a smaller sum and drip feed. Then when there is a good correction I load much more than usual. Putting a lump sum now, at historical highs not for me thanks
DCA all day
DCA all day, once a year :)
Great information as always Ramin. Personally I like to keep some cash in the Lyxor Smart Overnight Return UCITS ETF Class C at 5.2% per year. So it makes me feel psychologically better when there is a 1 to 3 month dip as it's an opportunity to buy some more index trackers at a low price. It also means I have some spare cash available if I need it quickly without having to sell any of my index trackers.
Is this CSH2 (I think?).
@@hustlinhitch That's right, CSH2
DCA is much better if a Japan-style crash occurs, with lump sum you'd be down on your investment for literally 2 or 3 DECADES before you make any fort of profit.
That's why you DCA normally, then when the market is down, lump sum. Removes the stress.
@@UndisturbedMonk True, its a good idea to combine the 2 strategies I agree, the duration for DCA is also up for personal taste and risk tolerance.
The longer your money is invested, the better right? Lump sum every time - if you can afford it - assuming you are a long term investor.
I do agree that you should double-down if the market is falling.
In the u.s. the s&p returned 25% in 2023. You say not to time the market but wouldn’t a prudent investor take the 2023 gains then invest in tbills while the market shakes out?
It depends on the "prudent" investor's investment time frame. If you're looking at returns over 10 years, then it doesn't matter if the market "shakes out" over a space of 9 months.
Severance package=inheritance=sold a business
US stocks have been more expensive than European stocks since the 1990s. Some investors have been complaining about expensive US markets for decades.
Lump sum is favoured by brokers for selfish reasons😆even though they earn more on commission with DCA, in the case of lump sum you put a bigger SUM of money right away on their platform.
I agree, I suspect VG was a little biased with that report
That's what I was thinking. Can you trust their findings? Probably not IMO.
This is a very timely video, as I'm sure there are many people like me who are feeling a bit under invested in stocks. It's tempting to wait for that big pullback, but that rarely works out. I devised a scheme for myself that combines a rule with some flexibility. My rule is, I must invest $X every calander month in my favorite S&P index fund (VOO) over an 8mo period (which is highly likely to encompass at least one 5% to 10% pull back) , but I can decide the exact timing during each month. That works for me psychologically. I also sold a series of puts for each month, which would automatically accelerate the drip feed if markets fall, and generate some fee income if they don't.
What timing, I've recently devised a plan of weekly over 6 months for VG S&P 500, LifeStrategy 100% and some high volatility tech funds, (different investment strategies). The reasoning is simple, looking over the last 10 years, stocks have taken 3 to 9 months to crash, and similar to recover. So we know PE is high, we are in a very unstable situation (middle east and Ukraine unrest), and markets are falling heavily, but in c. 6 months the money printers will start up again for the US election cycle and interest rates expected to be cut. So we could see either capitulation or a fall over the next 4 months, followed by an upturn and huge growth once again.
Well that's my thinking, of course we shall see.
Nethertheless and as you say, managing the swing of emotions is also key and as I can't resist checking daily/weekly, DCA manages this really well.
Your Freetrade link seems not to be working at mo Ramin.
Hi @stevea7021 I've just checked it and it seems to be working now. Thanks
I’m curious if the money withheld when dripfeeding is at least earning the cash rate? 🤔
Confirms why I am right in fully funding my Stocks and Shares ISA on 6th April each year via Vanguard
I'm paid weekly and invest every Friday. Must be honest I do get spooked if markets rise and I don't buy and hope they drop so I can buy.
Its the bank crashes that im worried about.
I retired in 2021 sold my business put it in the market 30% of money markets 70% S&P 500 as of last week the money markets return little more the S&P 500 made 5% in 2 years if I had invested that money a year ago I would have made 20% on the S&P 500 putting all your new money risk-free money markets and then dollar cost average stocks
"fear of investing" doesn't vanish if you make drip feed investing, even on a ten year period. At the end of the process the value of all your investment will be the average of the purchasing prices and 100% sensible to market swings. In other words psycology, that lead to choose a mixed or all equity portfolio, makes all the difference
2:37 - "Drip feeding is a form of market timing" - I don't see how, market timing by definition means you make decisions based on price fluaction, drip feeding does not necessarily mean you care about the price, if your strategy is to drip feef for the next 12 months regardless of price.
Drip feeding is just reverse market timing. You're spreading the timing over a wider area to reduce variance.
You are still making a decision based on price fluctuation, just over a longer timescale. I.e. to make the decision to drip feed when you have an option to invest a lump sum, you are hoping that the market goes down in the early part of your timeframe.
Drip feeding is betting that the average price over the next 12 months will be lower than the current price.
And statistically this happens 33% of the time.
@@shamusj "You are still making a decision based on price fluctuation" - how exactly, if DCA is usually described as buying, say, every month, REGARDLESS of the price? This is not "buying the dip". "you are hoping that the market goes down" - not part of the definition for drip feed, this is not a requirement. Its basic deifnition is buying with a certain interval, it says nothing about price, you can MODIFY it to be that way, but its not part of the main definition. Someone who drip feeds into a global index for 12 months, say, buying every 1 month could be making a bet he will get a better average price than lump sum and could be totally indiffirent to it because he doesn't know where the market will go - as is usually recommended and explained by financial professionals. So it has no relation to market timing. Its basicly a sort of hedging strategy.
@@MagicNash89 And why would one need a hedging strategy?
Bottom line is: if you have a lump sum you can put it in, if you don't: you do the other.....
A long-term drawdown period of a decade can only happen once in a decade ;-)
One needs to calculate the risk. Statistically, it’s not good to invest a lump sum when the market is overvalued. There is no doubt about it. Today, the market is overvalued
What a nonsense statement. Nobody can predict the future. Describing the market as “overvalued” is a moot point and makes zero sense. Overvalued compared to what/when? Is it at all time highs? Yes. But the same can be said in 5 years, 10 years, 15 years, so on and so forth. Lump sum or invest on a regular basis and think long term.
Nonsensical.
It always will and has hit all time highs because over time markets drift up.
But the market can stay over valued and irrational for a long time. How long do you wait on the sidelines waiting for a return to rationality/ sensible valuations while missing out on returns?
So in other words... buy a lottery ticket... same odds...
Thanks
Thank you @stevenroberts5081 much appreciated! Ramin
This is why many are better suited to an FA. To remove the responsibility of having direct access to their investments. Many individuals also micro manage market moves and loose as they are essentially swing trading and not investing.
That time span makes no sense. Your drip scenario is fully invested for 75% of the year.
Agree. Cost averaging can vary but I would expect the standard comparison to be 1/12th instalments monthly over a year.
If you've got a workplace pension, you can't do much other than drip feed your investments.
What you can do, is to increase your percentage contribution from the legally required 5%, so that the Tax Man helps by adding his 20p to every 80p you pay in pre-tax. I've got 5 years before retirement and I'm stuffing 50% of my salary into my L&G works pension. It's not as painful as it sounds because of the 80/20 split with HMRC. However, there are limits to what you are allowed to contribute so get advice, or look on the HMRC webite before you start.
I'm surprised you don't consider investing in Banks or BS. Fixed term at 5.2%, for a while, for those who are fearful.Isn't the expectation of global Index investing 5 or 6% a year?
£500 max interest then everything else taxed at 40%? You can put your £20k in a cash ISA, maybe you meant that. OK but depends on interest rates staying high for when your fixed rate finishes and you need to reinvest it.
@@jont96686if you go for low coupon gilts then the capital gains are tax free. Actually fairly decent right now
I made 10% in a month this year
I can only drip feed. Paid mothly and never have the luck of winning, or the opportunity to save for, larger chunks. You mention that you did it for too long at 2 years but what should i do at 6 mobths or a year into a monthly drip? Sell?
You could DCA over 12 months and it crashes in month 13. I really don't see it as any solution to avoiding the impact. If, like me, you are about to start drawing on your savings then you are always living with the potential of a crash with no obvious way to avoid the impact apart from waiting for a recovery. Crashes are usually short-lived but what if we get another 'lost decade' like we did in the 70's.....
I think the lost decade scenario is worse than a short lived crash tbh. That's my bigger fear rather than crashes within the normal volatility parameters. I don't know what strategy would work in a lost decade scenario and is there any way of predicting that? Would be good to see a video on that.
very few people have a lump some at their disposlal.. most people work for a salary
They could of won the lottry
I think in this context ‘lump sum’ is relative. Some people consider £1000 a lump sum
In which case they will be drip feeding into their pension, but if they do ever come into a large sum of money then this advice is relevant
Lump sum just means you already have some money and you invest it all at the same time.
Most of it is luck.
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