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SPY or VOO?
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Wouldn’t your money earn more money if you contribute the max at the beginning of the year? More days to earn more interest?
Stocks don't pay interests
It depends. There is no ‘correct’ answer. I’ll tell you why...
On 1/2/2020, SPY (S&P 500 ETF) opened at $323 and, as of 12/9/2020, is at $366.
Let’s say you did lump-sum and bought all $6K on Jan 2nd. That is a 13% return on the year.
Let’s say you did DCA and decided to buy only $2K on Jan 2nd, then on March 3rd you saw SPY drop by 10% to $290 and had $4K sitting on the sidelines ready for action, so you bought another $2K, then DCA’ed the remaining $2K for the remaining months. (For fairness, we are not going to assume that you perfectly timed the market and bought at the lowest price possible ($218 on March 23rd).
That return is already >13%, so this year, DCA would be better.
However, if the market had no major dips this year and went up like crazy, then lump sum would have been better because you bought in at a cheaper price on day 1, as opposed to the person that DCA’ed at increasing prices throughout the year.
In summary, no one could possibly know what each year holds. Sometimes DCA will win out, sometimes lump sum will.
Oh my goodness, thank you for the explanation!!! 😅
I do max it out and invest it at beginning of the year as soon as possible. It’s one less thing I have to worry about and less transactions appear when I review my activity on PC. Then I can focus on investing outside of my Roth IRA.
If I wasn’t maxing out my HSA and 401k which DCA a larger amount, I would DCA my Roth IRA investments.
I am maxing out on first business day in January, via backdoor Roth.
Think of it this way, If I were paying you same amount, would you rather have it upfront or does it matter if I pay you in over 12 months? Time value of money.
Chief
I would spread it out over a few weeks. But if you have the money on Jan 1, don't take the whole year to get it invested. Maybe take up to 2 months, depending on market volatility at the time.
Chief
Not buying at a high and seeing your money lose half it's value the next day or week if you happen to be unlucky.
I personally prefer to DCA. I'd rather buy in at an average at $10 instead of risking buying at a price of $20. Of course, that also means you won't cash in if you were lucky enough to buy in at $5.
It's all luck and risk mitigation. No one has a crystal ball.
See here for how 4 different scenarios play out over 40 years: lump sum at the worst time every year, lump sum at the best time every year, 1/12th of max amount each month, and front loading in January.
Choosing the best time each year is impossible. The second best? Front loading in January. And the difference between the best possible timing every single year and front loading in January each year was just 9.3%.
https://www.personalfinanceclub.com/five-ways-to-time-your-ira-contribution-lump-sum-monthly-and-more/
Awesome website! Thank you for sharing the wisdom! 🙏🏼
What the article and other people on this thread aren’t taking into account is what some people might do with the money they don’t front-load into the IRA. People are assuming that people who don’t front-load are letting that extra monthly cash just sit in a low interest money market account. But if, for instance, one chooses to DCA, and then use the extra cash they have left over to put it all into TSLA or ARK funds or BTC, then the person who isn’t front-loading could, of course, fare way better than those who do.
I don't have links handy but there is academic research suggesting that "time in the market" is one of the most important drivers to returns, and that maxing out your IRA on January 1 every year will be better than dollar cost averaging it in each month over the year.
Hey all, this is probably a stupid question. Should I have both 401(k) and Roth IRA? I do the max (6%) which is matched by my firm right now. If I should have both, any recommendations on where to get one from? I can use a referral link too :)
Thanks M1. I’ll look into it!
Feel free to tell me to Google it lol
Beginning. Various simulations out there on google where you can see how people would fare if they invested Jan 1, at the peak of each year, at the low of each year, and equal amounts spread out each month.
Obviously we can’t choose the low each year. But the different between up front and the optimal time wasn’t all that much.
In short, the correct answer is 100% at the beginning of the year. Dump it in and forget about it and move your focus to another investment vehicles. /thread