need wise advice re 確定拠出年金 allocation

[Mike]

First time poster. About ten years ago my company began a 確定拠出年金（企業型）. In this plan, 15% of our theretofore accumulated 退職金 was put into this (確定拠出年金) which each employee would be responsible for managing. At this point I have about 1.4 million yen in it (The other 85%, the company keeps and manages for employees until they turn 60 with an annual rate of return of 2.5%. Currently, my amount for this (called, 確定給付年金) is about 9 million yen.) Moron that I am, till now I have left all of the money my 確定拠出年金 to languish in a cash equivalent 元本保証 option making virtually nothing. While my wife and I have been quite frugal and have saved up a goodly amount and we do own our home outright, neither of us has explored investing. Now, in goddamn middle age, I have awoken to investing, (and am glad I found this excellent site) and would like to ask a question. In my sudden awaking to the possibilities of investing, I am very keen to get started right away diversifying the 1.4 million yen I have in my 確定拠出年金 or DC. I am 49, married with one child and work for a Japanese company. As I mentioned, I have all 1.4 million sitting in complete 元本保証 making nothing. In my company’s DC plan there are the usual mutual fund choices (domestic stock-based, domestic bond-based, international stock- based, and so forth.) I am of the mind to keep half of my money (700,000 yen) in the current 元本保証 options. The question I have to is, at what pace should I insert the remaining 700,00 into the more wealth-producing options, whatever the allocation would be. Should I dump it in all these or gradually over time? As I am itching to make up for lost time, I am wont to dump it all into the more wealth producing options in one fell swoop but I am not sure this would be wise. I would be very grateful for any advice from wiser and experienced people here. Mike

[RetireJapan]

Hi Mike

You have come to the right place! I'm glad you found us

Your situation is pretty normal. I've helped a few people with this, and my impression is that almost everyone that has one of these corporate DC schemes is still in the default cash allocation...

You have a couple of options:

1. put everything into your desired allocation all at once
2. decide a schedule to move the funds into your allocation, for example split it over a year or two years and move 4-8% every month

Mathematically, 1 is the better choice, but many people find 2 more comforting psychologically (what if I move all my money and there is a big stock market correction?). You should pick the one that fits your character better

We seem to be due some kind of correction, but of course no one knows when or if that will happen.

Anyone else?

[adamu]

Mathematically

Pedant mode activated! Maybe statistically, not mathematically.

I understand that historically going all-in has won over instalments on average, but it's risky either way. There are times when averaging comes out better, but it's impossible to know in advance, so anyway makes sense to go with that you're most comfortable with. A good thought experiment is putting yourself in the worst outcome in both situations:

1) You go all in, then the market falls. Will you be thinking "If only I'd held off for longer" for X months/years?
2) You average, and the market continues a steady rise. Will you spend every month agonising over whether you should increase your instalment amount, go all in, or regret not putting in more earlier?

[RetireJapan]

Heh, every group needs pedants

Statistics is a branch of mathematics, is it not?

The reason going all in tends to work better is the market goes up about 2/3 of the time. But if you're going to feel sick if it drops the day after you put your money in you should choose option 2

[jcc]

It's a matter of risk vs reward.

Putting it all in at once is higher risk and comes with a higher reward.

Dollar cost averaging it mitigates a significant amount of risk, and reduces the window of reward.

It's not really all that different from choosing between a bond/stock allocation and straight stocks: a mix will give you a more stable stream but probably less, while straight stocks should give a higher return but can wave up and down and has a real possibility of giving significantly less.

I'm happy I DCA'd because I had a whole lot of savings to put in early february but decided to just put in a few 100,000 each month until I'm done. If I'd blown it all at the start I'd be down a chunk now. But instead I got to buy a lot of stuff while it was at the pit of the correction, and I'm up overall.

I've also been using those monthly injections as a chance to keep rebalancing, so I've been putting cash into the items that fell the hardest and not into the ones that have been going up. It's a huge aid to keep me from making emotional decisions

[Dan]

Hmm, why do you want to leave exactly half of the assets in the ganpon hosho? You may regret doing that one way or the other, regardless of the amount you choose.

If there is a big stock market crash you will be sad for seeing half of your hard-earned corporate pension savings decimated. But on the other hand, if the stock market does well and rallies you will feel regret over returns that you missed out on. I’m just saying, you may end regretting to decide on how much to keep in ganpon hosho whatever amount you choose at the beginning of your investment journey.

You could just as well keep 1/3rd or 2/3rds, or 1/5th or 4/5ths, of the total 1.4 million in the ganpon hosho, right?

[Mike]

Thanks so much for taking the time to answer. All of your responses have given me some excellent perspective (which is the most important) in order to arrive at a decision, very much appreciated. I hope somewhere along the line I will be in a position for do the same for a novice. Mike

[adamu]

Statistics is a branch of mathematics, is it not?

Touché. When I read "mathematically" it felt like you were saying it was a simple calculation that guaranteed that putting a lump sum in was the most sensible choice (like choosing a bank account with higher interest payments), whereas while it is statistically likely, it's still a probability and could go the other way, plus is vulnerable to the error of panic-selling during a dip in the worst case.

[RetireJapan]

Touché. When I read "mathematically" it felt like you were saying it was a simple calculation that guaranteed that putting a lump sum in was the most sensible choice (like choosing a bank account with higher interest payments), whereas while it is statistically likely, it's still a probability and could go the other way, plus is vulnerable to the error of panic-selling during a dip in the worst case.

Happily I think we're on the same page with this one.

I have actually been moving cash in the UK into my Nutmeg account (in advance of Brexit), but I've been doing it in drips and drabs instead of all at once despite the statistical advantage to doing a lump-sum