At some point in our lives, we might be fortunate enough to have a lump sum of cash to invest for a future purpose. This could come from an inheritance, selling a business, or another mature investment. If you’ve found yourself in this position, wondering how best to deploy your money into the markets, here’s some advice that might help.
The Challenge of Investing Lump Sums
Historically, over any 12-month period, the stock market goes up roughly 75% of the time and declines the other 25%. Investing a large lump sum can be daunting due to the fear of short-term declines and the regret that may follow. So, for most investors, putting small regular amounts into the markets is more palatable and manageable.
The Advice
If you do not need the money in the short term, invest it by sunset. This approach won’t eliminate short-term uncertainty, but proceeding in any other way will only result in you second-guessing.
Looking at the MSCI World index, a research paper published by US-headquartered investment giant Vanguard in 2023 found that between 1976 and 2022, lump sum investing outperformed cost averaging 68% of the time after one year.
It’s an understandable emotional challenge—seeing a temporary decline after investing a large lump sum. But drip-feeding your funds may not be the best solution. The argument in favor of drip-feeding investments into the market over a period of time is based on the idea that by investing a fixed amount at regular intervals, an investor can take advantage of lower prices when prices drop. This can result in a lower average cost per share or per unit bought. This type of investment strategy is known as pound-cost averaging, or dollar-cost averaging if you’re in the US.
The Fundamental Problem with Pound-Cost Averaging
It’s a market-timing strategy. Holding money back and then investing it later only makes sense if you believe the prices of the assets you are planning to buy will fall for a while and then eventually rise. As it is unlikely that many investors are making such forecasts, a drip-feeding strategy may not be the best choice.
The Only Compromise You Should Make
Whilst “drip-feeding” capital is sub-optimal, you should at the very least agree upfront on when and how much capital you will deploy. This prevents future second-guessing and the paralysis that can result from market declines during the process.
So invest without second-guessing yourself: invest by sunset.
Benefit from comprehensive, integrated, and objective advice.
Let’s discuss your specific needs and how I can help you meet your objectives
Find out how we can help you
If you would like to understand more about this topic get in touch
Related posts
Published On: October 16, 2024|5.4 min read|Advantages of Offshore Bonds for Non-Doms living in the UK
One of the major announcements in this year’s Spring Budget was news that the current tax regime for ‘non-domiciled’ UK residents is changing. For ‘non-doms’ out there, it’s worth understanding what changes are being introduced – and when – and the implications from a tax perspective.
Read more
Published On: October 16, 2024|4.9 min read|Pensions planning as an expat – Is a QROPS still the right move?
More and more people are relocating for work or retirement. As a result, individuals moving overseas often prefer to transfer their UK pension benefits rather than leaving them in the UK. Likewise, those moving to the UK might want to bring their overseas pension benefits with them. Understanding the impact of such transfers is crucial.
Read more
Published On: October 16, 2024|4.4 min read|How Offshore Bonds Can Help Non-Doms Navigate the New FIG Regime
In recent years, changes in tax regulations have significantly impacted individuals who are classified as non-domiciled residents (“non-doms”) in the UK. The introduction of the new Foreign Investment Gains (FIG) regime is one such development that has created a new set of challenges—and opportunities.
Read more
