Should you invest a lump sum all at once or spread it out over time? Best practice
Martin Lewis gives advice on investing inheritance
We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info
A study from Nortwestern Mutual Wealth Management compared a rolling 10 year returns on $1million (£721,700) investment starting in 1950 using the two different strategies. Results showed that a 100 percent stock portfolio using the lump-sum investing outperformed its counterpart 75 percent of the time.
And bond portfolios showed outperformance by lump-sum investing 90 percent of the time.
When it comes to investing, there are a lot of decisions and options to weigh up against each other.
Each investment opportunity is different, and investors are just the same, but every investment comes with risk.
People are driven to investing through the prospect of returns and optimising these is every investors goal, so when it comes to how one actually invests their money it truly does pay to do research.
Although, it’s also important to note that past trends and successes do not necessarily indicate future possibilities for the investing sector.
What each portfolio holds will also impact the outcome of the returns, as certain markets and product types handle different investment strategies well whilst others cannot oblige by certain strategies in the first place.
The study found that the outperformance of lump-sum investments holds true regardless of the stocks/bonds mix invested in, having contemplated a varying amount of portfolios with different stock/bonds splits and other products.
The study assumed that the $1million (£721,700) would be invested evenly over 12 months and then held in the investment for nine years, for the pound-cost averaging study.
For a portfolio with a 60/40 split between stocks and bonds, the outperformance rate was 80 percent.
The average outperformance in all-equity portfolios was 15 percent, for 60/40 split was 10 percent and 100 percent fixed income portfolios saw four percent outperformance.
This data suggests that for medium-term investments it is generally a better option to invest once with a large amount, although pound-cost averaging can give an investor more accurate market timing.
Like with every investment, simply using the lump-sum strategy does not guarantee returns on an investment.
It’s key to understand ones risk appetite and how much they can actually afford to lose before investing any amount.
Matt Stucky, a senior portfolio manager of equities at Northwestern Mutual Wealth Management commented on the study:
“If you look at the probability that you’ll end up with a higher cumulative value, the study shows it’s overwhelmingly when you use a lump-sum investment [approach] versus dollar-cost averaging.
“There are a lot of other periods in history when the market has felt high.
“But market-timing is a very challenging strategy to implement successfully, whether by retail investors or professional investors.”
He continued: “From our perspective, we’re looking at 10-year time horizons in the study and market volatility during that time is going to be a constant, especially with a 100 percent equity portfolio.
“It’s better if we have expectations going into a strategy than afterwards discover our risk tolerance is very different.”
Source: Read Full Article