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IRA lump sum? USA (mander.xyz)

submitted 10 months ago by 32sqft@mander.xyz to c/personalfinance@lemmy.ml

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I’ve read that if you have the money up front, investing it as a lump sum on January 1st will produce higher returns more often that investing on a monthly/weekly basis. Is there more to consider in 2024 with our current high interest rates?

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[–] yo_scottie_oh@lemmy.ml 4 points 10 months ago* (last edited 10 months ago) (1 children)

The theory is not based on interest rates, but rather tax loss harvesting.

Hmm… this is different from how I interpreted the advice around investing lump sums versus dollar cost averaging them in. I thought it had to do with the adage that in the long run, time in the market always beats timing the market, meaning one should always invest as much of their capital as early as possible—in the case of IRAs, that would mean January 1 assuming the previous tax year’s contributions are already maxed out.

[–] dhork@lemmy.world 0 points 10 months ago (1 children)

Making any investment yearly at the same time is attempting to time the market, it's a bet that the market will be lowest at that point vs the rest of the year. Otherwise, why pick Jan 1? Why not pick July 4? If the price is lower on Jul 4, you end up with more shares, as well as a small increase due to 6 months of interest.

When you DCA, you basically admit that you don't know how prices are going to move, and you are spreading out your risk. Yes, DCA over 12 months may leave you with slightly less than if you put it all in on Jan 1, assuming the price was the lowest on Jan 1. But if you have monthly investments that whole time, it's likely that at least one or two of those might have been bought at a lower price than Jan, and it may turn out DCA could result in more shares of whatever you are buying.

The "time in the market" adage applies over years, not months. On a scale of 10 years+, it doesn't really matter whether you bought in Jan or July.

[–] yo_scottie_oh@lemmy.ml 3 points 10 months ago* (last edited 10 months ago)

Making any investment yearly at the same time is attempting to time the market, it's a bet that the market will be lowest at that point vs the rest of the year.

Except when we’re talking about accounts with maximum annual contributions (e.g. IRAs).

As I mentioned in my original comment, assuming one subscribes to the philosophy that in the long run, time in the market always beats timing the market, then logically it follows that one is better off investing a lump sum as early as humanly possible (i.e. as soon as they have the capital available to invest). If somebody doesn’t subscribe to this philosophy, then of course we’ll never agree on investing the lump sum up front vs DCA.

In the context of investing a lump sum all at once versus DCA, DCA is a form of timing the market. The only time DCA isn’t a form of timing the market is when the capital is only available in certain intervals (e.g. disposable income from wages).