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How to Invest my Bonus

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Money Talk > Retirement Planning

Should I dollar cost average my bonus?
Yes. Put all of it in immediately.
42%
 42%  [ 3 ]
No. Dollar cost average it over the next year.
14%
 14%  [ 1 ]
No. Do something different. See my post below.
42%
 42%  [ 3 ]
Total Votes : 7

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Wino
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How to Invest my Bonus  Reply with quote  

I am certain that the market is currently being propped up by the Fed's quantitative easing. The question becomes whether the market will crash when they cut back on the amount of the now-infinite timespan they are talking about. Cut back they surely must or inflation will return and the times under Jimmy Carter will look like paradise.

Anyway, if the economy ACTUALLY improves before they are forced to cut back on QE, then the market will probably have a minor correction if any.

Now comes my dilemma. I am getting a very large bonus in about two months. I am definitely going to put it into the "boring" index funds in Vanguard. How much goes to IRA (no retirement plan here, so all of my taxable income is fair game, I think) and how much to after-tax investments is one question I'll tackle at the time. The real question becomes how to invest the funds.

I am leaning toward a lump sum purchase in market index funds. Which ones to pick to be decided over the next couple of months. My other option is to Dollar-cost-average the investments over the rest of the year. I know the histories and that DCA is not usually the best way to go, but that's a gamble, and I'm certain QE is going to take its toll eventually. I just don't want to pay that toll keeper shortly after dumping a lot of cash in the market.

So, any suggestions? I know there's a lot of speculation in this post, but I have been pretty good in seeing things before they happen in the past. I've also mis-called quite a bit. The amount of money involved is large to just about anyone who can accurately count the numbers of rooms in his house in his head.

The poll will run for 45 days. After that, I will have to have already made my decision.
Post Thu Mar 14, 2013 8:49 pm
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Eric69
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Ok....so if you know one of the worst decision to make as an investor is to speculate why are you doing just that?

First thing you want to do is turn off the TV and stop listening to the squawk. Half the TV says the market is set for collapse and the other half touts its great returns lately. The fact remains the NO ONE KNOWS what the market will do. Market go up and down....thats how it works. Trying to time things will, most likely, lose you some gains.

Whats so boring about Index Funds? Youre not playing craps here Smile

I say go with the Vanguard Total Market Index fund and Total Bond Index Funds....Id say that is fairly diversified Smile

I hate to give another site a plug but you might want to check out the site Bogleheads.org and post this same question over there to see the great advise you'll get (not that you wont get plenty here). Its a site dedicated to Indexing and changed the way I look at investing. I was in the same situation as you lately and started getting serious about investing....

BogleHead Philosophy:

1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep Costs Low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course


Last edited by Eric69 on Thu Mar 14, 2013 10:42 pm; edited 1 time in total
Post Thu Mar 14, 2013 10:10 pm
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Wino
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You never answered the question: Should I DCA or lump sum invest?

Absolutely ANY decision you make before the fact is speculation. That statement makes no sense on the face of it.
Post Thu Mar 14, 2013 10:42 pm
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Eric69
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Well I think you know what I mean when I talk about Speculation

Im simply responding to the first part of your post on trying to time the market and not to discount the power of Index funds

I have no idea what your current financial situation is so to give you definite ideas wouldnt be smart.

Do you have a ROTH? Id populate 2012 and 2013 with $10,500 to start.
Post Thu Mar 14, 2013 11:06 pm
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coaster
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quote:
Originally posted by Wino
Absolutely ANY decision you make before the fact is speculation

I think that's a matter of semantics. There are always unknowns in every decision. What the Fed will do and how the market will react are unknowns. I say make the decision on what is known, and leave the unknowns out. Since you are trying to decide between investing a lump sum and dollar-cost averaging, making that decision based on unknown future events, is, to use your own wording "a gamble". Well, then, don't make that decision. And don't gamble. Do both methods. Invest 50% now and dollar-cost average the rest.

~Tim~
Post Fri Mar 15, 2013 12:14 am
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Eric69
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Yeah.....I would think DCA is just another form of market timing. I'd do a lump sum investment into index funds

But.....More importantly, we need specifics on your financial situation to give advice:

1. How much is the bonus?
2. Do you have credit card debt? Student loans?
3. 6- 12 months of emergency funds?
4. 401k at work? Do they have a company match?
5. Do you have a ROTH IRA? Traditional IRA?

Beyond That, I know the big buzz word going around is the infamous Quantitative Easing. I think it's essential to stop listening to media reports. Remember these bozos who show up on Fox and MSNBC know no more then you or me Smile
Post Fri Mar 15, 2013 12:53 am
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oldguy
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quote:
Should I DCA or lump sum invest?


I've read the studies that say it is statistically better to 'lump sum' - ie, slightly better odds. Personally, I chicken out and DCA when I have a large amount (such as when I sell a rental house). And I've been wrong every time.

BTW, if you decide to DCA that doesn't necessarily mean monthly - annual investing on a 30 yr plan counts as DCA.
Post Fri Mar 15, 2013 2:36 am
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Wino
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To answer your questions:

1. Amount of bonus nknown at this point. I am expecting north of $100K, but south of $350K. Much of that depends on our CFO and how they account for building rental, utilities, insurance, etc.
2. Only debt is mortgage, and it is on schedule to be paid off within a year, excluding the bonus from any calculations.
3. I cannot count my emergency fund as do others, as I have basically zero in expenses. I have about $20K in various checking accounts. Note that I use these accounts for transferring money from one country to another and for living expenses. We have another account that I don't "count" which has about $15K in it. I guess it could be called an emergency fund.
4. No 401K. I live and work for a foreign-owned company.
5. I have a Roth, but with the bonus I cannot put any in it for 2013. I can only back-door up to $11K for my wife and I in a traditional IRA.

I have already decided to put it all into index funds. The only other possibility is to purchase a second house. We're already renting out the first house while we're overseas.


Last edited by Wino on Fri Mar 15, 2013 11:09 am; edited 1 time in total
Post Fri Mar 15, 2013 4:37 am
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Eric69
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Nice bonus! Smile

I'd put it all into index funds. Vanguard has the Total Stock Market fund and their total Bond Fund. Leave it in and forget it till you retire.

I really urge you to also post on the Boglehead forum as well..I.especially with your DCA theories. Ill be looking looking foward to what others here and there have to say.

Also read their wiki and check some articles and books on Boglehead investing strategies. Actually there are none....just index invest and forget it with some occasional asset allocation.
Post Fri Mar 15, 2013 11:50 am
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Wino
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I have been considering another course of action. What are the opinions for this option?

I can keep my house in the US and rent it out at about +$800/month after expenses. For rough budgeting purposes, that's $10K per year. I can add that to my income for investment purposes, and still purchase a second house using the bonus as down payment and perhaps a cash-out refinance on the current house. That means I can get about $140K out of my existing house to add to the bonus. The $140K is the amount of a mortgage with about $800/mo payments; that's then "break even as long as I have renters." The second house we're looking at is about $400K. In no case will I have two mortgages, so I will probably have to come up with up to $100K for the second house, even with the cash-out refinance, depending on the bonus amount.

My reasoning is that even if the economy crashes, people will still need to live somewhere. Real estate prices will take a hit, but that's good for rental markets. Outright owners are fairly insulated from short-term calamities in RE. I might lose one place (the one not yet paid for), but the other place will be the haven while we wait out the time until economic recovery. If the markets skyrockets, then I make money on equity and value increases.

So, if the above is feasible, I have three basic options, other than "Bank of Mattress." Wink
Post Fri Mar 15, 2013 12:20 pm
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oldguy
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quote:
2. Only debt is mortgage, and it is on schedule to be paid off within a year
Why?

quote:
Outright owners are fairly insulated from short-term calamities in RE. I might lose one place (the one not yet paid for), but the other place will be the haven while we wait out the time until economic recovery. If the markets skyrockets, then I make money on equity and value increases.


But won't you be better insulated if your own the house, owe $140k, and have the $140k in the bank? That gives you leverage, if the house appreciates, the appreciation is 100% yours. Consider the opposite - if you lend someone $140k and then the economy tanks, that puts you in the position of trying to recover your $140k from someone who is broke, out of work, and hungry - ie, you are probably going to lose your $140k. So wouldn't you rather OWE $140k than lend $140k? I would.

US mortgages are among the cheapest capital in the world, no other nation lets you lock a fixed rate loan for 30 yrs. And 4% is a very cheap price for 'long' capital. I would put a $140k note on the house, put the $140k with the $100k bonus, and put it in the SP500 Index.
Post Fri Mar 15, 2013 3:07 pm
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Wino
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Your points are valid, but only if the QE being done by the Fed doesn't crash the market. Then my $140K can become $110K or less overnight. Now I owe $140K and have only $110K to pay it back with. Lose my job on top of that, and I'm out $30K and have to sell my house.

I have a great income. I can continue to save over and above these investments. I would be turning down $10K/year guaranteed and paying it as interest. Next year, I hope to have this same problem of where to invest my bonus (which should be larger, I hope). At that time, depending on circumstances, I could put the bonus into an index fund.

I'm still investing several thousand per month in index funds. Why shouldn't I have diverse investments including RE, index funds, and maybe some bonds, once I figure out how bonds work. I've been reading morningstar on that, but it's still pretty much Greek to me.

The Fed's money pumping is definitely scaring me, I'll admit. I believe in the Dow. I don't believe in the DC.
Post Fri Mar 15, 2013 3:24 pm
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Eric69
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I think you are purposely trying to over complicate. In addition, you are speculating an economic collapses... Why? Do you honestly believe that will occur?

Look at the returns of the S&P the last 10 years ......with both the dot com and housing bubble crashes included. It's quit positive


Last edited by Eric69 on Fri Mar 15, 2013 6:07 pm; edited 2 times in total
Post Fri Mar 15, 2013 6:02 pm
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littleroc02us
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I have voted in your poll to invest all of the money in the market. I don't think DCA is a great idea in this situation, because in a way your trying to time the market. I have learned from my own experiences.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Fri Mar 15, 2013 6:05 pm
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oldguy
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quote:
Then my $140K can become $110K or less overnight. Now I owe $140K and have only $110K to pay it back with. Lose my job on top of that, and I'm out $30K and have to sell my house.


Or you could have a heart attack? Or a sink hole could suck down your house? Or a great famine could cover the Earth? Or??

Anyway, the first rule - risk and return are directly proportional - applies. So if you want to build wealth you'll need to assume some risk.
Even with your substantial income stream it is nearly impossible to 'save' your way to wealth, you need risk to build wealth.
Post Fri Mar 15, 2013 8:50 pm
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