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Should a Lump Sum be Invested All at Once?

Written by Preet Banerjee

Friday, April 27th, 2018

If you happen to receive a windfall of some sort and you decide to invest it, what makes the most sense — investing it all at once, or bit by bit over time? And if the markets happen to be strong, should you wait for them to pull back before doing anything? After all, it's "buy low, sell high" — right?

A very famous saying in investing is that a large factor of success boils down to "time in the market, not timing the market." Other main factors include having a diversified portfolio, keeping costs low, regular rebalancing, and sticking to your original strategy through thick and thin.

Go Ahead and Invest

For people who don't have a lump sum ready to invest, setting up an automatic, regular contribution to an investment portfolio over time is really the only way to get started. And although a pullback in the markets can happen anytime, we may intuitively feel a pullback becomes more likely as the timespan since the last one grows.

But if you're going to be a long-term investor, and you aren't starting with a large lump sum but rather with regular contributions, you should feel pretty confident to go ahead and start investing right away. It's actually possible to see your portfolio value increase even when the underlying investments have been volatile and have a negative return for the year.

That might seem paradoxical, but watch this video to see how a monthly $100 contribution into an investment that loses value for the year can actually leave you with more than $1,200 (12 monthly $100 contributions) at the end of that same year.

Why this Happens

The reason this can happen is that if the bad performance of the investment occurs at the beginning, then your early $100 monthly contributions are buying investments at a lower price per unit. If those investments rebound during the balance of the year, you can actually end up with more money than you put in.

So if you're starting from scratch and thinking about setting up regular contributions, have at it. You don't really even feel the effects of a market pullback until you have some more skin in the game. While a 10% pullback when you have $500 in your portfolio is $50, that won't cause most people to lose sleep. But if you had $100,000 in the market, now a similar 10% pullback is worth $10,000 in dollar terms. And you might start to notice that.

What About the Lump Sum?

Which brings us back to our question about what to do if you do have a lump sum. Maybe you got a big bonus at work, received an inheritance, or sold a big-ticket item. The short story is that, historically speaking, investing a lump sum right away has led to a higher ending dollar value more often versus slowly deploying that lump sum over extended periods of time into the same portfolio.

So the odds are in favour of investing the lump sum all at once, assuming you could stick to either plan perfectly.

Second Guessing

The reality is that we tend to second guess ourselves all the time. Any long-term portfolio with a degree of risk in it should be expected to have pullbacks from time to time. If you were starting from scratch and slowly building up your portfolio over time, you'd gain experience with market pullbacks while you have relatively little skin in the game. But when investing for the first time with a larger lump sum, it's easy to see how someone could be quite anxious.

Take Baby Steps

The right strategy for you includes knowing how your emotions can affect you and your decisions. A perfectly acceptable option is to take baby steps with deploying your cash. What I mean is that you could divide that lump sum amount by 12 and make monthly contributions into your portfolio, as an example. You could possibly divide it by 24 and take two years to deploy it, but any longer then that and you run the risk of having too much cash sitting idle for too long.

And finally, if you're dealing with a large lump sum and are still confused about what to do, consider seeking personal advice. Your due diligence should include researching what to look for in a qualified financial advisor, and then interviewing more than one to get a better sense of all your options.

 

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