Investing a windfall

Was browsing the Bogleheads forum today and had a look at a thread "Investing a windfall". I clicked on the link because I felt that it was useful to know what to do in the case of year end bonuses or performance bonuses.

Investing a windfall

The thread starter was already a seasoned investor and she dollar averages her monthly salary into a 60/40 portfolio. However, this time, she received a large windfall, and she is not sure whether to invest it in a lump sum, or to do dollar cost averaging. I think she probably asked this question because the lump sum is rather large and sizeable to her.

Some answers and advice

The Bogleheads community is really friendly and helpful. I knew it because I have asked some questions in there before and many responded. Some answers were very insightful. Here are some responses as to whether to invest the lump sum of windfall or to do dollar cost averaging.

"I say invest, ignore the noise, which apparently you know how to do. Time not timing"

"Alternatively, if the idea of investing it all at once makes you nervous, then consider dollar-cost averaging it in. Or investing half immediately and DCAing the rest"

"IIRC studies have shown that lump sum investing wins out over dollar-cost averaging (DCA) about 2/3 of the time. But psychologically people are generally wired to avoid loss which may explain your desire to "buy low" - i.e., not make a bad timing decision"

My vote for the best answer

The best answer wasn't something that was given by the comments. However, it was given as a link in one of the comments. I took the information from Portfolio Solutions: here.

To summarise, we have to check if the windfall is more than 20% of the current portfolio. If it isn't, then one can safely do a lump sum investment since the lump sum wouldn't make much of a difference anyway. However, if it is more than 20%,  it is better to split the windfall, investing one portion as a lump sum, and the other portion using dollar cost averaging over a period of time. The portions can be split in a 50-50 manner.

I would suggest 1 year as this allows us to minimise entry point risk and yet not miss out on the opportunity cost of entering the market late.
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