lystn

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about a very hot topic which is, “Do you allocate everything now in lump sum or do you allocate over time if you’re just getting started in investing?” The good news here is that I think that a lot of data and research has already been done on this and in particular, Vanguard did a bunch of research on this which you can find online on Vanguard’s website that has the performance of lump sum investing versus some deviation of dollar cost averaging or systematic investing in the future, basically this idea that if you have this lump sum of cash that you’re going to invest in the market, do you do it all just now and throw it into a diversified portfolio or however you build your portfolio with options or do you dollar cost average into this over time and start to average down in the market or wait for a market fall or a better entry? And what they found and what a lot of people have also found is that generally, the lump sum investment does better. And the simple explanation is that when you get the money invested sooner, it has longer time periods to compound, so that just even small holding period that you are waiting to invest is loss opportunity. At the same time, what it also alleviates is this stress that you’re going to feel in the future when you start to go into your investment cycles. If you say, “I’m going to invest at the end of every year.” when you come around to that yearly investment that you would have to make, you start to run into friction with yourself because you think to yourself, “Things have changed.” or “Now it’s different.” or “Maybe the market will fall even further because it already has rallied so high.” or “Maybe the market’s falling and it might fall even further because it’s already fallen.” Whatever the case is, you start to basically roadblock yourself into making systematic mechanical decisions, so for that reason, lump sum investment is better. I think when it comes to options trading, this makes it insanely more easy because when you start investing with options, not only do you have defined risk, defined profit, defined expectations which is unlike say a bond or stock portfolio which has a lot of downside risk, you carry a lot of market systematic risk in general market portfolios that are 60/40 bonds or 50/50 bonds and stocks, with options, you have the ability to cover and manage risk from the start and you have the ability to adjust where your portfolio is on a monthly or bimonthly basis. The reason I think that this works so well for options is because if you were to invest say all of your money into an options trading strategy and build out an entire portfolio of trades, if the market changes next month, because your options contracts that you’re trading are 30 or 60 days out, you have the ability to quickly readjust and re-center the portfolio over the new market price. That doesn’t happen with a regular stock or bond portfolio. If you invested now and the market is really, really high on a PE basis or on a valuation basis and the market goes down, you don’t have the ability to close those positions and readjust those positions lower. You’re basically going to take a loss all the way down. With options trading, you have the ability to adjust and systematically move with the market every single month. It’s really like getting both sides of this thing at the same time. You have the ability to lump sum, but you also have the ability with options trading to systematically dollar cost average or move your portfolio around where the market is trading. The market goes down, you move your portfolio down just by the sheer activity of entering new positions for the next month. The market goes up, you readjust your positions higher as you enter new positions for the month. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.