Lump Sum Investment -- A Reader QuestionI have just finished reading your article entitled The Best Way to Invest Money. I was very pleased to come across this as it is exactly the kind of investment advice I've been looking for. I recently received a large gift from a relative (about $5000). I have very little investing experience and have been searching for the smartest way to make a lump sum investment with this money. I am currently a sophomore in college, my annual income is not the highest but I am hoping using a form of you're investment plan will help me pay off my loans faster after I graduate. I am currently looking at a Vanguard target retirement fund dated for 2015. I know you mentioned it in you're article, but I wanted to make sure that it was possible for me to use this fund even though I am not actually planning to retire in 2015. This fund seems to be about a 50-50 split between stocks and bonds. I was wondering if this would be a fitting ratio for someone in my position. My annual/bi-annual additions would not be very high. Also, in light of the very recent market decline, it would be very helpful if you had any advice as to whether or not I should wait to see if the market continues to decline further, or if now is a good time to invest. I would appreciate your input tremendously and I look forward to hearing from you. I understand you have other priorities and I know this email is rather extensive but if you could get back to me on your own time that would be delightful. Thanks for your time and for the great article! -L. L., Congratulations on being smart with money at such a young age. I was not as smart as you when I was your age. I can never make that lost time up. You are already ahead of 95% of the population. Yes. You can make a lump sum investment in any target retirement fund at any point if you like. It may even feel a little sneaky, but Vanguard sure doesn't mind. You're giving them some money for a fund. For all they know, you may have already maxed out all your retirement accounts that are tax sheltered and wish to invest additional money for retirement that is not tax sheltered. Perhaps you plan on retiring at the age of 35. You would be doing nothing wrong by investing in a target retirement fund without the intention of using it for retirement. I recommend putting $3k (the minimum) in there ASAP and then slowly feeding in the other $2k -- perhaps $200 a month. This way if the market fluctuates wildly in either direction, you are at a much lower risk for losing a lot of your initial value. The practice of putting in a steady amount of money over time allows you to take advantage of the dollar cost average principle. Don't worry about the recent market declines. Don't ever worry about that. I know it is hard. All you can ever do is make the best decision with the information you have. Sometimes you will lose even with the right decisions, but if you continually make the right decisions, you will win more than you lose in the long run and that is the best you can ever hope for. The only time to maybe pay attention to it is in the extremes (early 2000 or early 2009 as examples of both extremes). The best way to recognize those extremes is the PE ratio of the entire market. I use Vanguard's Total Stock Market ETF to approximate the PE of the market. If you don't think you can stop worrying about market fluctuations, put your money in a money market account and/or a bond index fund and sleep well. There's no shame in that. You will do better than if you panicked as the market fell like many did in early 2009. You have even less to worry about with your lump sum investment with the 50-50 stocks-bonds target retirement plan because if the stocks fall and the portfolio gets to 40-60, then they will rebalance (not sure when) and you will automatically buy stocks on the cheap and sell bonds after they've gone up in price. Typically stocks and bonds move in opposite directions. -David return from Lump Sum Investment to Index Funds |