Join Josh and Austin as they discuss lump sums: what they are, what to do with them, and everything you need to know about them! In today’s episode they share advice from some of the smartest investors of all time –this is one you don’t want to miss, tune in now!
Main Talking Points
[0:40] – What is a Lump Sum?
[1:10] – How Do You Acquire a Lump Sum?
[2:15] – What is NOT a Lump Sum?
[2:48] – What Can You Do With A Lump Sum?
[3:37] – Dad Joke of the Week
[5:33] – Smart Investors’ Advice
[6:16] – Time in the Market vs. Timing the Market
[7:42] – How to Grow Stocks Over Time
[10:33] – Bad Timing
[11:14] – What Should You Do With a Lump Sum?
[12:32] – Dollar Cost Averaging
[13:57] – How to Get the Process Rolling?
Links & Resources
068: How Long Should You Hold Stocks? – The Invested Dads
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast. Simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey. Welcome back to the Invested Dads Podcast, the podcast where we take you on journey to better your financial future. Today, we are going to be talking about lump sums: what they are, what to do with them, and everything you need to know about them.
Josh Robb:
And I should start off by saying I think you should get any lumps checked by your doctor.
Austin Wilson:
So Steph, if you’re listening to this, you should tell Josh-
Josh Robb:
Apparently. Different lumps.
[0:40] – What is a Lump Sum?
Austin Wilson:
Yes, exactly. So the question, the real question that we have today is, first of all, what is a lump sum?
Josh Robb:
Yeah. So high level, a lump sum is just a chunk of money that’s available to invest at one time. So if, for instance, we’re talking 401K and you’re adding money in every paycheck, that’s not a lump sum because it’s coming in over time.
Austin Wilson:
Those are small lumps.
Josh Robb:
Yes. A lump sum is a big chunk of money that is saying, if I wanted to, I could put this money in all at once. I have it all available at one time.
[1:10] – How Do You Acquire a Lump Sum?
Austin Wilson:
Exactly. So then the next question would be, how would one acquire a lump sum?
Josh Robb:
You win the lottery.
Austin Wilson:
That’s one option.
Josh Robb:
Win it. If you don’t choose the annuity option in your lottery winnings.
Austin Wilson:
Right. Based on the statistics of lottery winners.
Josh Robb:
You probably should actually.
Austin Wilson:
You probably should.
Josh Robb:
Yeah. As bad as it is growth wise, you probably should just do that.
Austin Wilson:
So bad. So no, really? How, how would someone get a lump sum? Well, aside on one thing is you could get life insurance, that’s something that’s come into my mind.
Josh Robb:
So an inheritance, a life insurance, a chunk of money that shows up due to an event. So a death of someone where you’re listed as beneficiary.
Austin Wilson:
Sale of a business.
[2:15] – What is NOT a Lump Sum?
Josh Robb:
Sale of a business, sale of a house, you get a lump sum. So any kind of transaction that results in a big chunk of money coming to you. Also, depending on how your company plan is set up, if you have a pension or something like that, they may offer you a lump sum option instead of a monthly payout. And so there’s a lot of ways where you could get a chunk of money, even something as simple as graduation. Maybe you get a lot of checks in your graduation party, and then you have a lump sum of money to do something with. So really just you acquiring a bunch of cash. Now what it is not is, let’s say I have an account and I want to move it somewhere else. If that account was already invested in the market and you’re moving it just to a new advisor somewhere else, that’s not a lump sum for what we’re talking about because it was already invested. This is money that’s coming in or new invested money coming in. So that’s what we’re referencing when we’re talking about a lump sum.
Austin Wilson:
So suppose you get this lump sum. Yep. This big bucket of money.
Josh Robb:
Win the lottery.
Austin Wilson:
You’re walking around and you find the end of the rainbow, you get the pot of gold.
Josh Robb:
Ready to go.
[2:48] – What Can You Do With a Lump Sum?
Austin Wilson:
That’s when you can invest. What are your options with what you would do with that lump sum?
Josh Robb:
Yeah. You have three choices.
Austin Wilson:
Ooh.
Josh Robb:
Do nothing. Do nothing.
Austin Wilson:
There is a third choice.
Josh Robb:
Yes. Do nothing. Which then the end of this episode and it’s over and it’s kind of boring.
Austin Wilson:
That’s it. So option one, do nothing and watch inflation eat your money away.
Josh Robb:
Yeah. Two. You could get it invested right away. Put it all in the market.
Austin Wilson:
Right away.
Josh Robb:
Invest whatever you’re doing investing wise. Or, the third one, and we’ve talked about this in past episodes, is what’s called dollar cost averaging, which is just the same as that 401K I just talked about, is over a set year at a time consistently put money in until you’re done. And so let’s I have-
Austin Wilson:
You make a plan.
Josh Robb:
I have $10,000, and for 10 months I put a $1,000 at a dollar cost average over that timeframe.
Austin Wilson:
Absolutely.
Josh Robb:
Yeah. That’s an example. All it at once or spread it out over time.
[3:37] – Dad Joke of the Week
Austin Wilson:
Okay. So I’m going to take us a break real quick. We’re going to do a dad joke of the week early.
Josh Robb:
And then we’re going to get into some fun stuff.
Austin Wilson:
And then we’re going to talk into some fun stuff. So here’s my dad joke the week.
Josh Robb:
Ready.
Austin Wilson:
I hope you get this. Why does Norway’s Navy have barcodes on their ships?
Josh Robb:
Norway’s Navy have barcodes on their ships. I do not know.
Austin Wilson:
It’s to scan the Navy in.
Josh Robb:
Scandinavian. And I like it. I got it.
Austin Wilson:
So that’s the dad joke of the week brought to you by r/dadjokes on Reddit.
Josh Robb:
Reddit.
Austin Wilson:
Love it. So we’re back to really the nuts and bolts of what this entails.
Josh Robb:
What we run into a lot as of advisors.
Austin Wilson:
Here’s the question, right? The question is, well, Mr advisor, Mr. Josh Robb, why I don’t you just put it to work at the exact right time. Find a big market dip for me and I’m going to be much better off. Right? That is what everyone wants.
Josh Robb:
And even people who may have been dollar cost averaging at their employer their whole life, and seen the long term results of adding money in consistently, they get a big chunk and then all of a sudden they’re tempted to wait until there’s that right time, exact time to put it in the market. That’s what you’re talking about.
Austin Wilson:
So yeah. What is the answer that you should give?
Josh Robb:
Yes. And so always, always, always, it’s near impossible to perfectly time the market. Can you get lucky? Sure. But putting money in is really hard to know when the exact downturn is, when that will come, and whether worth waiting for that is valuable or not. For instance, we had a 10 year bull market just recently before we broke it.
Austin Wilson:
Before COVID.
Josh Robb:
Before COVID. If someone was waiting in 2010 said, oh, we just had a big downturn, the market’s coming back up, it’s pretty strong, it’s growing, 10% plus a year.
Austin Wilson:
Waiting on a dip.
Josh Robb:
I’m going to wait for the next downturn.
Austin Wilson:
You were waiting a long time.
[5:33] – Smart Investors’ Advice
Josh Robb:
Wait and waiting. And then by the time you actually get that downturn, even the drop is still higher than when you would’ve just started at the beginning. So that’s why timing is really a hard, hard thing to do. In fact, I know you have quotes, you love quotes for people.
Austin Wilson:
I love quotes.
Josh Robb:
That there’s quite a few smart investors who have said it similar.
Austin Wilson:
Yeah. So here’s some smart investors. Warren Buffet being one of them, Oracle of Omaha himself, he once said, “I’ve never met a man who could forecast the market.” And if there was a guy who could forecast the market, you’d think it might be someone like Warren Buffet who’s been investing for-
Josh Robb:
He says he can’t.
Austin Wilson:
80 years. Yep. Nope, it’s not him. Ben Bernanki, the former fed chair, said “Don’t try and time the market.” And a famous investor, Peter Lynch, he also said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”
Josh Robb:
Yes. And that comes back to what I was talking about is sometimes exactly you hurt yourself by trying to be too smart with what you’re doing with your money.
[6:16] – Time in the Market vs. Timing the Market
Austin Wilson:
So this is where the thinking of time in the market, as opposed to timing the market, that’s where that, the time in the market is more important than timing the market. Because time in the market is not a way of capturing the long term return of equities, it is actually the only practical way. You have to stay in the market to win in the market. That’s a simple wealth, inevitable wealth, Nick Murray-ism that we’re talking about there. So talk about some numbers here. So Josh, suppose you retire. 62. Pretty common rate, retirement age. How likely is it that you were going to live a long time after that?
Josh Robb:
Statistically you’re looking at the average life expectancy for a couple is into the nineties. And so at 62, you’re looking at 92, roughly, that’s 30 years. And so if you have a lump sum, again, going back to like those pension options, sometimes right at retirement a chunk of money shows up, and you have a choice of what to do with it. You sell business, those type of things. Well, you got 30 years for that money that needs to last. So-
Austin Wilson:
What do you do?
Josh Robb:
What’s the best choice?
Austin Wilson:
Well, first of all.
Josh Robb:
Wait for that correction to get it in just right. It’s my last chance.
Austin Wilson:
Or, what would happen if you took option A that you mentioned earlier-
Josh Robb:
Just sit on it.
Austin Wilson:
… and just sit on it?
Josh Robb:
Oh, that’s not good.
[7:42] – How to Grow Stocks Over Time
Austin Wilson:
Well, especially in today’s world. So we’re sitting at 7.9% inflation, which is not going to be here forever and it’s very abnormal. But inflation is the thinking right here. So if you sit on cash and do nothing, your money is going to lose an average of 3% in purchasing power per year, right? So that’s not a great option, for one, and what has been the most well known and well proven way of keeping up or outpacing inflation.
Josh Robb:
Stocks.
Austin Wilson:
Stocks.
Josh Robb:
Stocks have historically been the asset class that consistently beats inflation.
Austin Wilson:
Absolutely. But they are also not without risk. But to get the reward of higher returns, you have to tolerate the risk. And not to mention a cool part about stocks that, as opposed to fixed income, fixed income is what?
Josh Robb:
It’s fixed.
Austin Wilson:
Yeah. Stocks have growing income as portions of with dividend payments that grow over time as part of the appeal to that. So stocks are really the only answer and we’ve done episodes and discussions on why it’s really the only option to grow over time. Now bonds and stuff have different for purposes in your portfolio for certain people but stocks for growth is the way to do that. Let’s talk about timing. We talked about it a little bit. What about bad timing?
Josh Robb:
Yeah. So the idea here, is this is where all this comes from is you have a big chunk of money. You worked really hard, your whole career, now this chunk makes up a big portion of probably the success of your retirement. And so you get drawn into this, well, what if I put it in and the market drops and all this hard earned money, a portion of it goes away. And that’s a possibility. It is. If somebody, for instance, would’ve retired at the end of 2021, and then sold their business and put money in January, well, they’re down what, 12% on the SP something like that right now. So they lost 12% of that lump sum they just put in and they’re probably not happy.
Austin Wilson:
But did they lose it?
Josh Robb:
Did they lose it is the question. And that’s what we’re going to talk about.
Austin Wilson:
Because another example would be, suppose you were like the worst luck timer of the world. You retire mid-February, you get a lump sum check, and you get it invested on February 19th, 2020. Which is a couple years ago now, right before COVID?
Josh Robb:
Peak before COVID.
Austin Wilson:
Peak before COVID. You invested at the top. Oh no. All of a sudden you’re down 33% in a month or so. And that $1 million you’ve supposedly put into your account now is down to $666,000.
Josh Robb:
Ah, man. I’m mad.
Austin Wilson:
That’s tough to stomach. You’ve lost a third of your money. But is it really that bad? Because think about this, if you did nothing, you stayed invested, you didn’t make a bad choice and sold when things are down, if you stayed invested, you were made whole again by late summer. Now that is a really short example of some of these bear markets. Corrections in bear markets occur, corrections about once a year, bear markets once every three, four, five, depending on the timeframe looking at years, that’s 10% or 20% downturns. But remember, there has never been a 20-year period where you’ve lost money in the stock market, and actually, especially lately, those time periods have been much shorter.
Josh Robb:
I think 17’s the actual, at least the last one I saw.
Austin Wilson:
Yep.
[10:33] – Bad Timing
Josh Robb:
So can you have a bad time into the market? Yeah. Does that affect your long term results? Yeah. I’m going to be honest with you, it does. Does it affect it enough where the risk reward isn’t there and you should wait for our drawdown? No, it does not. In fact, your long-term average is even if you time it the worst part, is you still get satisfactory results. You still get kind of on the lower end of the average, but you still get somewhere in that 7%, 8% long-term results in S&P 500. That’s good results.
Austin Wilson:
That’s pretty good.
Josh Robb:
It’s beating inflation, coming back to what we’re talking about.
Austin Wilson:
And historically speaking, stocks are up three out of every four years.
Josh Robb:
Yes.
[11:14] – What Should You Do With a Lump Sum?
Austin Wilson:
That means one and of every four years is going to be down anyway, that’s just the nature of the stock market. So keep that in mind when you start looking at that lump sum. So Josh, the question is, is there the best time to do a lump sum of money?
Josh Robb:
Yes. Actually there is.
Austin Wilson:
What?
Josh Robb:
Wednesday.
Austin Wilson:
Okay. Tell me more.
Josh Robb:
Lump day.
Austin Wilson:
Lump day. I like it. I like it.
Josh Robb:
That’s a joke. Wednesdays don’t really matter.
Austin Wilson:
But the real question is, what do you do with that lump sum?
Josh Robb:
Yes. So just straight historical numbers wise, what we just talked about is the sooner you get the money in, the longer you give it to give the potential of growth. That’s idea. Now we say this to clients a lot, you’re probably listening to this, it’s always the yeah, but. Right? If you have any kids, sometimes that’s like their answer to, yeah, but. So okay, I just have a hard time doing that. The what if. Right? Well, what if this time is the oh 08, 09 where it’s 54% down. Well, we still know, historically, you give enough time, you’re still going to average a good return.
Austin Wilson:
– and then go up further.
[12:32] – Dollar Cost Averaging
Josh Robb:
Yes. You’re still averaging a great return if you were the worst timer in that time period. But you needed another 20 years, 15 years, to get back and have a satisfactory average return over 7%. Now, if you’re just worried about that, this is my one shot, my last big chunk of money, sold my business, whatever it is, I just, I’m a hard time, I’m worried about that. I just… Historically, I’ve had bad timing. I’m the worst, I’m the unluckiest person, whatever, dollar cost average. Right? We talked about at the beginning, that was your other choice. Is there a best time to put in your money? Yeah. Do it right now. If you just have a hard time doing that, then set a plan and stick to it. Just say, okay, I know maybe this will smooth things out. Maybe you’re going to be right. Because if you dollar cost average down, you’re in a great spot. That is awesome. So if you are that person in January, and every week from January through now you’re putting a little bit of money in, that’s awesome.
Austin Wilson:
You’ve outpaced the market for sure.
Josh Robb:
You just averaged. Yeah, you just averaged in a really good investment. Now.
Austin Wilson:
But it goes the other way too.
Josh Robb:
You have to stick with it. Even if it’s going up, you’re just moving out that time period. So it’s not ideal, but it’s still not going to ruin your long term success. You’ve got to stick to it because the worst thing to do is say I’m average in, then the market drops, the exact same thing you want, then you freak out and say, well, I’m going to wait for it to get worse and then you just messed everything up.
Austin Wilson:
Absolutely.
Josh Robb:
Yeah. Lump sums, great. Put it in. Forget about it. Just let the market do its thing. If you’re hesitant about it saying, I’m not sure, I’m worried about what’s going on, the news, then set a plan, say I’m going to set an automatic to do this every month, or every week, or however often you want it to go, and I’m going to stick to it. That’s your second best choice. The third choice. Leave it in cash. Just don’t.
Austin Wilson:
Don’t do it.
Josh Robb:
Unless you need cash. Unless it’s $5,000 and you’re like, I’m going to be spending $5,000 in a month, just hold it. Then at that point, it’s not a lump sum to invest, it’s just extra cash you got.
[13:57] – How to Get the Process Rolling?
Austin Wilson:
So suppose this sounds pretty daunting for our listeners. And they may think, they’re going to come into a lump sum, what is a practical thing that they can do to get the process rolling?
Josh Robb:
Yeah. Depending on how you get that, there’s a lot of tax consequences, estate stuff. Talking with an advisor is huge. And that’s big because you, for instance, I mentioned selling your business. You sell your business and you get a big chunk of money, well, maybe that’s not all your money. Maybe the government gets a portion of that. And if you invest it all in the market goes down, which we just talked about, it’s a possibility, long-term you’re fine, but if you also then need to sell something to give the IRS their money, then you’re really not happy about that decision. So talk to an advisor about what your choices are and what the best investments are for that, what your goals are, how long, how aggressive they should be, where you’re trying to go with this money. If you’re hesitant, then set up a plan with your advisor, they’ll help you stick to a dollar cost averaging schedule. They can help you automate it, make sure it’s getting done correctly. But high level, especially if you’re worried about it, that’s what the advisor’s there for. They can work you through, talk you through options, and maybe help you see things you didn’t think about.
Austin Wilson:
So that is the 50,000 foot view of lump sums. Obviously there is a lot more nuances by situation. And again, talk to your advisor about those individual circumstances because they can be very different. But in general, yes, you should be investing this money if you don’t need it right away. And there are multiple ways to do that. So yeah, good thinking Josh on that. And as always for our listeners, check out our free gift to you. It’s a brief list of eight principles of timeless investing. These are overarching investment themes meant to keep you on track to meet your long-term goals. It’s free on our website. We don’t necessarily talk about lump sums, but it’s part of a lot of people’s overall financial plans. So hopefully some of those principles will help you there. Josh, how can people help us grow this podcast?
Josh Robb:
Yep. Make sure you subscribe. That way every Thursday you get our newest episode. Leave us a review on Apple Podcast or Spotify. That’s always great. And then if you have any questions, thoughts, concerns, or have a story about lump sum investing you want us to know about, shoot us an email at hellowiththeinvesteddads.com. And as always, if you know somebody who’s dealing with this, share this episode, hopefully it’ll help them a little bit.
Austin Wilson:
All right. Well, until next Thursday, have a great week.
Josh Robb:
All right. Talk to you later.
Austin Wilson:
Bye.
Outro:
Thank you for listening to the Invested Dads podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review. Click subscribe and don’t miss the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
