Balancing Emotion and Finance: The Impact of Investing Well For Retirement

I'm going to give you today the financial answer and then we're going to talk about real life , because it's one thing to have it on paper , it's another thing to go . Oh my gosh , how do I feel about actually implementing that ?

I think the answer is going to be surprising to a lot of you , but I hope that it is helpful , because my goal , every single episode , is to make content that makes you go Yep , I'm thinking differently about that , or nope , that resonates exactly what I was thinking before .

I want you to just have this be your ultra clear podcast that hopefully can simplify things so you can think about some things a whole lot more that are important and stop thinking about things that are absolutely irrelevant in terms of your plan . Oftentimes it's just talking about . Here are things I want you to think about .

I also want you to not spend any time or energy on things that I don't think you should be spending this time and energy on . So , without that rambling , let's hop into today's episode , which starts with the review of the week , which comes from Jim via email . Jim says already love the content .

Expecting a little girl in seven weeks and feel prepared that because of your content I am confident I will be okay and she will be okay . Love the anti vacuum planning examples from previous episodes . Appreciate all the work that you do in the future , looking forward to more stories from clients .

And if all of you share similar sentiments to Jim and want more client stories that I often like to go through during my podcast , of course , submit a question to me on my website earlier , trymentpodcastcom , and let me know .

Okay , so today's episode is all about dollar cost averaging versus lump sum , and so the first place I always start here is kind of similar to buying a new stock . I'll say if you didn't own it before , would you still buy it ?

And what I mean by that is a lot of people will have $100,000 worth of Apple and they'll just keep holding it because it's done really well for them . Maybe they bought it for $20,000 and now it's worth $100,000 . And so there's that inherent emotional bias , that attachment to the position .

I'll say what if you didn't have any Apple stock , would you still buy it ? And if the answer was yes , then wonderful , you've thought through it correctly . Now there's other aspects , of course , but same thing here where , if you're sitting on $100,000 and it's just in cash right now , or a million bucks , I have people that come to me .

They have two or three million dollars just sitting in their investment account because they're going to retire soon , they don't want to do anything incorrectly and they want to make sure they're managing their portfolio well , and they just don't want to screw up and they're going .

Should I put this in a little bit at a time , which is known as dollar cost averaging ? Should I do it all at once , which is like a big lump sum investment , what makes most sense ? And so , of course , we're going to go over the financial reality and then the life reality . So this is technically should I dollar cost average ? Should I lump sum ?

It's really one question . Invest it in a manner that will allow you to fund all of your goals . That's kind of what you want to do with this money . That's why you have it . And should you invest it all at once or dollar cost average .

The answer to number one , which is , how do we invest it in a manner that will allow you to fund all of your goals , is find that right mix of stable assets and growth assets , because you want to ensure you can generate a rising income stream , not for tomorrow or next year , For the next 40 or 50 plus years .

If you want to retire early , whether it be early 50s , early 60s , the reality is you need this to last for a long time . You are a young investor and so that's not too difficult for you to grasp . I'm going to imagine you go , are you ? I am crystal clear on that . The question now becomes is what do you do ? Did you invest or should you invest ?

And I'm going to give you an example Should you invest $600,000 to take a hypothetical here all at once , or should you spread it out over time ? The concern is that I imagine a lot of you had thought through at some point is oh my gosh , what if I invest all of it all at once in the market drops and let's say it market drops 20% ?

Well , we saw that last year . We see that in many years , or what a few . For example , sold your home and now you have $600,000 . And you invested . And this comes from a real client case , which is how I bring all these examples up . I always give clients who ask this the same exact example .

I say I'm gonna give you a few examples of what you can choose from . Okay , I'm gonna give you five investment choices . I'm gonna connect the dots here to dollar cost averaging and lump sum . I promise I'll say which investment would you like . The first one is positive 53% of the time . The second one is positive 63% .

The third one is positive 70% of the time , the fourth one is positive 77% of the time and the fifth one is positive 97% of the time . People go all right , I'm not dumb , I'm picking the one that goes up 97% of the time . That sounds awesome . And then I tell my clients or anyone reaching out I'll say they're all the same exact investment .

They are all the S&P 500 . This is the probability of positive returns over time . So , for example , when I said the first investment goes up 53% of the time , that's on a daily basis it's pretty much a coin flip . If you were to go invest on a daily basis , odds are you'll make money , but there's a 47% chance you would not Now .

On a monthly basis 63% of the time you will have a positive outcome 37% of the time you won't . On a quarterly basis 70% of the time you'll have a positive outcome 30% of the time you won't . On an annual basis 77% positive . And on a 10-year basis 97% of the time you will have a positive outcome . So when people say , why do I invest ?

Well , this is obviously a big reason is why do any of us invest ? You've probably experienced this , most of you have already , and you understand the value of investing .

But this is where you have to tie it into actually goal-based investing which , if you're gonna go purchase a new home or you're gonna retire and you're gonna make a big shift , where now , all of a sudden , we need to make sure there's a safety , we need to make sure there is income you can pull from .

What we don't wanna do is have too much invested in the S&P 500 to the point where now there's a 20 or 30 or 40% chance that all of our funds are down . And now it's not only what does this mean for future of 10 , 20 , 30 plus years from now , but what does this mean for the next five years ? Where will income come from ?

We need to protect against that and that's why a lot of people look at dollar-cost averaging . So what dollar-cost averaging really is ? It's a series of lump sum investments . So if you have $120,000 , and you're gonna invest that over 12 months , it's the same thing as making a lump sum investment of 10,000 every month . So very basic , of course .

Let's look at a few examples . If we're looking at market averages , the longer you stay out of the market , the more likely you are to lose money . Once again , the longer you're out of the market , the more likely you are to lose money .

Just like the example I just gave before 53% of the time , if you were to just flip a coin on a daily basis , you will make money , but 47% of the time you won't . But the reason that this is so basic and I keep it high level is because we're now gonna hop into some fun stuff here . Once again , $10,000 today .

If you are investing that , let's just assume that you did 10,000 all in one month . And once again , going back to the examples I just shared , on a monthly basis , s&p 500 average , it's about 63% of time positive . On a quarterly basis , about 70% of the time positive .

So if we're looking at this and going , okay , if we wanna invest $10,000 this month , there's a 63% chance that it's gonna be positive . Now , that's because 63% of time the market is positive over a monthly period , that makes sense . But what if we look at the final 10,000 investment over a 12 month period ?

77% of the time that's gonna be worth less than your first investment , which means the longer you wait , the more likely you are to underperform relative to one single lump sum investment at the beginning .

So let's stretch this out to an extreme example so you can really see what I'm talking about here , cause I know that that's it can sound like a lot right there . So let's look at two different investments , two dollar cost average investments , one now and one in 10 years .

Okay , now , when we look at this , it's interesting because only there's only a 3% chance that you actually come out ahead .

And , by the way , it's not just a lower chance of coming out ahead the longer you extend the dollar cost averaging interval , but the magnitude of underperformance that becomes a whole lot larger too , because you missed out on so much growth by not investing . This is just looking at the odds when you put everything in the S&P 500 .

Now , please know , if you invest in a diversified portfolio , the odds of being up are even higher over time , which means the odds of dollar cost averaging coming out ahead becomes even lower . The longer we extend the dollar cost averaging , the more likely we are to miss out on market returns . Now , of course , this isn't always the case .

If we knew , if anyone knew , there's gonna be a major pullback , then of course we'd wait . But no one does . And thinking there's going to be a major pullback is way different than knowing with certainty .

Nobody knows with certainty , but most people , for most of the time , they tend to overestimate the odds of there being a market downturn over the next six to 12 months . And they ask themselves and I would ask , you'd ask yourself do you think the market will be higher or lower in 10 years ? You'd probably say higher . If I had to guess , most people would .

So then ask yourself if you think it's more likely the market will be higher or lower in six months . Well , most people would say lower . We have a short-term bias . This is because you're a human being . The market's being down the last 15 months and then up a whole bunch year . To date .

There's uncertainty around inflation , interest rates , global issues there always is . So , of course , it's easy to see how the market could go down . We are just wired this way . It's so easy to convince ourselves that our markets are based on our superior logic and understanding of uncertainties that we face .

But here's what I actually want you to do Take a long hard look at that yourself , if that's truly a logical conclusion or if it's a fear-based conclusion wrapped up in logic . I'm gonna say it one more time Take a long hard look at that to ask yourself if that's truly a logical conclusion or if it's a fear-based conclusion wrapped up in logic .

Ask yourself that same question In 10 years from now , do you think the market will be positive or negative ? Most of you will say positive , and then I'd ask you , of course , in the next six months , what do you think ?

A lot of you would say negative , by the way , when I say that , of course , the market could absolutely drop in the next six or 12 months , I don't know . No one knows . That's always the case with the market , though . Just because it feels more likely now doesn't mean it actually is more likely compared to other times in the past .

There's no way to predict what's to come . So one of the things I said at the beginning of today's episode maybe it was even last episode I said my job is to help simplify your thinking . Please don't think about things that are out of your control , and this is one of them . When do I think a big downturn will occur ?

I don't know , but when that does occur , do you have instruments to start implementing to take advantage of those events ? So markets go down . Are you ready to implement strategic Roth conversions ? Are you on the sidelines Go ? Yep , I have a brokerage account , tax loss harvesting . I'm ready to go . Some people don't .

They're just kind of oh my gosh , I don't know what's gonna happen , I'm scared , whereas they're not looking at the proactive side . When the markets go up , I say wonderful , you're making money . When markets go down , I say wonderful , it's an opportunity to get in at a discount and do some awesome tax planning .

You can make money work for you , no matter what way the market is going . So where do I think things will go ? I have no idea . I could give you my personal thoughts , but it's really not going to be that helpful , because I don't know if it's accurate or not . In fact , I do know that it's not 100% accurate and no one ever is .

I realized that a long time ago and because of that , let's not kind of waste our mental bandwidth , if you will , on that . So what do I recommend ? Invest . I don't care if it's lump sum or dollar cost averaging . The reality is you are going to be in a good position by investing . If you want , the best absolute answer , it's to put it all in at once .

Now , emotionally that's difficult . If you put 100,000 in , it goes down 20% , you're like , oh my gosh , I lost $20,000 . And if you couldn't afford to lose that , then I would say don't invest that amount . If you need to have $100,000 six months later , maybe look at a high yield savings account instead .

If you're going to already know I'm really not going to touch these funds for 10 , 20 plus years , then I go okay , it's not necessarily fun if it goes down 20% , but would you be okay ? Yeah , you would . And so this is when I really ask my clients when do you need the money ? That's the dictator of .

Are you going to put it in all at once or you can do a little bit over time If you need a portion of the funds in the next three , six , 12 , 15 months . Okay , maybe we put that off to the side and we don't invest it , or we invest it in a much more balanced manner . The hardest part about this is really your emotions .

Let's pretend you receive $100,000 or a million or $10 million . It could be a business sale , a pension rollover , inheritance , lottery , whatever it is . If you're going to dollar cost average , what's the best way to do it ? The shortest one possible that makes you feel comfortable ? That is the answer . So if you're like Ari , I'm comfortable .

If I've got a million bucks , I'm going to put in , you know , $150,000 a month Great , then do that . If you're like no , I'd rather do $20,000 a month over time Great , do that ? Does it mean we're leaving something on the table ? Yeah , maybe , but it also might mean that you saved yourself from significant downturn . What I don't want you to do is go .

Okay , if I put this in $10,000 every month and then all of a sudden , six months later , markets go down , I'm going to reevaluate that . Commit to your strategy , go yep , I don't need this money for a long time . I'm going to give it the best chance historically at making the most money . I'm going to put it in all at once . Wonderful .

Other clients go nope , I want to put this in at a monthly amount . I'm not going to , you know , determine whether or not this is the best market time to do so . I'm comfortable . $10,000 a month is going in Great , commit to that $10,000 a month . This goes back to the point that investing at just once that that is the best option . On paper .

Every day , every week , every month , you extend your decision , meaning I don't know if I should put it all at once or I should do it monthly . That's hurting you . Every day , every week , every month , you extend that until you actually invest your dollars . The more likely you're going to come out behind because you just had that analysis paralysis .

So you are a lot of you , I know , expecting probably me to go through a deep example on dollar cost averaging , lump sum , what the different values come out to be , and I love doing that . But I don't want you to lose focus on the most important thing here , which is having the right strategy here .

If you want on paper what makes most sense , you can see right there through this basic example 53% of the time , if you were to invest your money , just daily coin flip , you are going to make money , so you have a 3% chance of coming out ahead .

If you were to put everything all at once Now , is that worth the emotional turmoil of seeing a million dollars go to $800,000 and a quick succession ? Probably not to a lot of you . So if that's you , then great . Absolutely take the approach of dollar cost averaging in . It's really about finding what strategy resonates with you .

So I hope this was helpful in thinking through this from a mindset perspective . With an early retirement , you really need to dial in your income . So if you are wondering , how do I create my income , how do I have the right tax strategy ? How do I make sure I'm not leaving anything on the table ?

That's , of course , what I love to do , and you can reach out to myself in the description below to see just how I help clients do that . That's all for today's episode . Love you guys . Thank you for listening to another episode of the early retirement show .

If you have a question that you want answered in a future episode , you can always go to my website , earlyretirementpodcastcom that's earlyretirementpodcastcom and you can go ahead and submit a question that I'll look to answer in a future episode . Thank you all for listening .

Please do rate it , review it and share it with someone who you think would benefit from this information . If there's anyone out there that you know , I certainly appreciate it and I will see you all each week . Hey guys , it's me again . Please be smart about this . Nothing in this podcast should be construed as financial , tax or legal advice .

Consult with your tax preparer or financial advisor before taking any action . This podcast is for informational purposes only .