Is now the right time to move a big chunk of cash into the market?

Will your nest egg last?
Will your nest egg last?

I'm newly retired and have $300,000 additional cash to invest beyond the $700,000 I already have in a portfolio of stocks and bonds. But right now doesn't seem like the best time to put a lump sum into the market. Any suggestions?--Larry

Yes, I have a suggestion: stop focusing on whether this is a good or bad, right or wrong time to invest your money. That may seem like a reasonable approach (and is certainly consistent with much of Wall Street's take on investing). But the more you think about it, you see that it's not actually a disciplined way to go about investing your retirement savings, or any money for that matter.

Consider: There have been many times in recent years when financial advisers and the punditocracy alike have warned that the market could be headed for a tumble, whether it was due to expected fallout from Standard & Poor's downgrading of U.S. debt in 2011, last year's vote by British citizens to leave the European Union or the surprise election of Donald Trump.

Yet, here we are today, with the market at or near record highs. Fact is, investors, both novices and pros, just aren't very good at divining the short-term direction of the market. We know the market will go into a deep slump at some point, as it has many times in the past. Problem is, we don't know when. It's easy to call market tops and bottoms in hindsight, but difficult to impossible to do so in real time. Which is why it makes little sense to base your investment decisions on guesswork about its possible near-term path.

Related: Do you need an annuity?

The smarter way to go: Build a portfolio that you'll be comfortable owning whether the market goes into a tailspin or continues to climb to greater heights.

The best way to do that is to create a mix of stocks, bonds and cash that can limit the downside during market setbacks to a level you can live with, yet still generate the returns you'll need to meet your financial goals (which, in your case, presumably means a portfolio capable of supporting you throughout a retirement that, as this longevity calculator shows, may last 30 or more years).

You say that you already have $700,000 invested in a portfolio of stocks and bonds. The first thing you need to decide is whether you're okay with how that money is divvied up. One way to confirm that is to go to Vanguard's risk tolerance-asset allocation questionnaire. The tool will give you a suggested blend of stocks, bonds and cash. By clicking on the "other allocation mixes" link, you can see how the recommended portfolio as well as others more aggressive and more conservative have performed on average and in up and down markets in the past.

Let's assume, just so we have some numbers for an example, that 60% of your $700,000 is invested in stocks and 40% is in bonds. And let's further assume that your current 60-40 mix is consistent with the portfolio suggested by Vanguard's tool. Which means that you're comfortable with how your savings are currently invested.

Well, if that's the case -- I mean if you're confident your current portfolio mix represents the right tradeoff of risk and return for you -- then you probably want to invest your $1 million (the $700,000 plus $300,000 cash) the same way that your $700,000 is currently invested.

I say "probably" because it's possible that the addition of such a large sum might affect how you choose to invest your portfolio overall. I suppose, for example, that you could feel more comfortable investing a bit more aggressively on the theory that with a larger nest egg you might not freak out as much if its value sinks more when stock prices drop. Or you could be inclined to invest a bit more conservatively, figuring that with a fatter savings balance to start with you don't need as high returns as you would with a smaller nest egg to draw the income from it you'll need.

I doubt, though, that such considerations are going to make that big a difference. Which means that in all likelihood, if you believe your current $700,000 is divided appropriately between stocks and bonds, then you should split up your $300,000 the same way. Thus, using the example of the hypothetical 60% stocks-40% bonds portfolio above, you would invest 60%, or $180,000, of your $300,000 in stocks and 40%, or $120,000, in bonds. That would leave you with a total portfolio of $1 million, 60% ($600,000) invested in stocks and 40% ($400,000) in bonds.

Related: Are you really ready to retire?

So the real question you face is how do you get that $300,000 in cash into a mix of stocks and bonds, be it 60-40 or whatever proportions you've decided are right for you?

You have three choices. One is to sit on your three-hundred-grand lump sum of cash and wait for a "better" time to invest it in stocks and bonds. But as I explained earlier, that's really not much of a solution. You're just playing a guessing game.

Your second choice is to dollar-cost average your $300,000 into a mix of stocks and bonds, shifting, say, $25,000 or so a month from cash, so that the money is fully invested in stocks and bonds over the course of a year. That's what many investment pros and most of my colleagues in the personal finance press would probably recommend.

But all dollar-cost averaging does is delay the time it takes to get your money invested in the mix of stocks and bonds you've decided is right for you. During that time, you're investing more conservatively than you should be (because of your large holding in cash). So if you choose to dollar-cost average your $300,000 into the mix of stocks and bonds you've settled on, you're effectively undermining your investing strategy.

Which brings us to the third and, to my mind, correct option: Move your $300,000 from cash to your target asset allocation all at once. So if your $700,000 is invested in a 60-40 mix of stocks and bonds and you believe that blend is appropriate for you, then you should immediately invest your $300,000 in a 60-40 mix of stocks and bonds. (In fact, if you're satisfied with the funds you already own, you can simply invest the new money in the same funds.)

Related: How do I retire with $1 million?

So don't waste your time obsessing about whether now is the right or wrong time to get into the market. You'll never know that except in hindsight. What you can know now, however, is what blend of stocks and bonds makes sense for you given your risk tolerance and financial goals. Once you have that appropriate mix, then any new money should be invested accordingly.

I'm not saying my approach will guarantee the highest returns or prevent you from taking a hit when the market drops. The only way to guarantee that is to have some way of seeing into the future and moving your money around based on what you know will happen. But we all know that clairvoyance exists only in magic shows.

So the best you can do in real life is to find an asset allocation that strikes the right balance between risk and return, and then stick with it regardless of whether your fellow investors are supremely confident the market is ready to climb to higher ground or scared stiff it's about to go over a cliff.

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