This article is composed by Bogleheads® forum member digarei
NINE (09) persons met at an undisclosed location in mid-town Sacramento on the Second Saturday of June 2016 at 10:30 AM to talk about Investment Policy Statements and the DCA vs. Lump Sum controversy. These topics were selected by members earlier in the year and are part of a series of meetings (“Plan to Invest”) slated for the months of June through September 2016.
The coordinator noted that everyone in attendance this month was a ‘regular’ member and dispensed with introductions, suggesting that members instead share something about themselves that they hadn’t yet spoken about in a previous meeting. Some of the responses were almost confessional, others were about personal milestones reached during the year.
Two books were touted, both by prominent authors, positioned high up on Greg’s list of recommended reading:
- ‘How to Make your Money Last’ – by Jane Bryant Quinn
- ‘The Devil’s Financial Dictionary’ – by Jason Zweig
Dollar Cost Averaging vs. lump sum investments
First on the agenda, chapter member Steve (“hollowcave2”) spoke on his controversial recommendation, which he feels is applicable to most investors with a substantial amount of money to be invested, to choose Dollar Cost Averaging (DCA) instead of lump sum—putting all of the money into the market at one time. Steve distributed a 4-page handout (‘DCA vs. Lump Sum investments’) and elucidated these points:
- DCA is a risk management technique
- DCA is not a method to increase the total return
- DCA helps you get over investment paralysis
Studies show that two-thirds of the time lump sum provides a better return.
However… when it doesn’t, such as during a market downturn, the practice
can imbue the investor with deep regret, and lead to untimely selling or the
wholesale abandonment of market investing.
People are afraid to put their money in the stock market. Investors actually feel worse when they lose money – more than they feel good about making it.
By spreading the investments out over a longer period you’ve reduced the risk of being in the market on any particular day. DCA reduces the risk of having to endure a market crash right after you’ve invested your money.
Conversely, Steve’s mantra for lump sum investing hints at the emotional cost to a lump-sum investor when they endure the misfortune to ride in just before the storm:
“Lump Sum works best with other people’s money.” – Steve (hollowcave2)
A lively discussion on this topic took place both during and following the presentation.
Investment Policy Statement
Next, Greg (“digarei”) introduced the second topic by passing out a two-page form entitled, Morningstar’s Investment Policy Worksheet. It’s designed to help investors create a written investment plan in short order by eliciting responses to a number of key questions. It’s a remarkably insightful approach that at first seems too abbreviated or simple to be effective but even experienced investors will be impressed by its depth and conciseness.
The group walked through the questionnaire, sampling a few of the questions, commenting on others. The worksheet’s initial questions probe capacity, investing horizon and expectations. Two examples:
How much of a loss can I accept over:
- A three month period? ________%
- A one-year period? ________%
- A five-year period? ________%
What is my target asset allocation?
- Large-company stocks
- Small-company stocks
Financial objectives are identified in another section and an investment philosophy is elicited:
- What’s important to me as an investor? _________________________
- What’s my philosophy about core vs. non-core investments? ________________
The worksheet’s remaining sections pose questions to help investors identify their Investment Selection Criteria and implement portfolio monitoring.
“The reason we build a plan like this is for when something really
bad happens—a 30% drop, 40% drop in just a few months, it’s all emotion at that point. Do this before any of the bad stuff happens.”- digarei
Who Does This Benefit?
Experienced investors who periodically reexamine their investment philosophy or policy may find the worksheet a useful prompt, to help them refine or improve their investment goals. Newer investors who have some understanding of the markets and personal finance but a limited grasp of investing best practices will get the most benefit from completing the exercise.¹
Greg’s conclusion was that having any plan is better than having no plan. “Even the one you have in your head is helping you—but it’s better to write it down.”
The Doom and Gloom Report • Jim’s Market Corner
To conclude the meeting (and instill terror into the hearts of any new investor present) the coordinator handed over the remaining minutes to long-time investor, James, veteran of multiple Bogleheads conferences (and one too many Money Shows…) His reports often succeed in conveying important market news, encapsulating the troubles and turmoils that affect commerce and trading… but are unfailingly entertaining.
This month Jim spoke of the year’s market volatility, the vetoed legislation that was to establish fiduciary standards for financial advisors, the Fed’s disinclination to raise interest rates and the recent polling that showed that Brexit could pass in a popular vote. Jim said, “That’s not priced in. If they get out, I think we’ll have a temporary sell-off. So, keep an eye on that.” ²
When the meeting was over, SIX (6) of us met for brunch at Kupros on 21st street.
An edited transcript (21 pages) that includes the discussion
items and conversations alluded to above was e-mailed to
meeting attendees on 10-18-2016.
¹ For those who would like to create an Investment Policy Statement (IPS)
—or revise an existing one—but don’t wish to wait for this topic to come up
again, follow the Morningstar classroom guide, linked below:
- Morningstar Portfolio 100 – Creating your Investment Policy Statement
© Copyright 2015 Morningstar, Inc. All rights reserved. Investing Classroom.
² From the ‘Bureau of 20/20 Hindsight’ : Brexit did pass. There was a temporary sell-off. And the markets bounced back very soon after.