If you are in the fortunate position of coming into some money, perhaps through an inheritance, and you want to invest the money, should you invest a lump sum in one go or monthly?
When I say investing, in this scenario I am talking about investing your lump sum in the stock markets rather than say a property or a business.
But before we discuss the advantages and disadvantages of each option there are a few things you need to be clear on first.
Actions to take before you invest a lump sum in one go or monthly
Before you make any investment you need to know the answer to these 3 questions:
- What is the goal of this investment?
- How long will you be investing for?
- What level of risk are you prepared to take with this investment?
Being clear on what the investment is for (your goal) will help you to answer the other two questions. For example, if your goal is to purchase a new or larger home in the future, you can calculate how much you will need and when you will need the money by. The longer the timeframe, the more potential you have to take more investment risk.
When we talk about a timeframe for investment it should be a minimum of 10 years, preferably 20! Anything shorter than this would limit the chances your investment has to deliver the return you require.
Invest a lump sum in one go or monthly: the advantages and disadvantages of each
Investing a lump sum in one go
The advantage of investing all in one go is that you are in the stock market straight away and your investment can start to earn dividends (profits paid out by companies to shareholders) and interest which will compound and start to build quicker. Did you know around half of an investor’s return is made up of dividends and interest rather than just growth in the share price?
If you are lucky enough to be investing at a time when the stock markets have dropped in value then you will be buying in at a cheaper time. The problem and disadvantage with investing the lump sum in one go is that the opposite could be true. Markets could be at a high point and as soon as you invest, they drop!
Investing monthly
Instead of investing the lump sum all in one go you could ‘drip feed’ the money in on a monthly basis, perhaps over a year or two. The advantage here is that if markets do fall each month your money could be buying cheaper and cheaper stocks. This process is called ‘pound cost averaging’ and you can find out more about this here.
The problem is, how long do you ‘drip feed’ the money in? Even if you did it over a year there is no guarantee that markets will fall over this period. You may find they keep rising and it would have been better to have invested all the money at the beginning.
Summary
Basically it all comes down to being able to purchase a crystal ball and then knowing in advance when the markets are going to fall and rise.
Of course this is impossible to do in real life and you should never attempt to time the markets. It’s time in the markets that count. Therefore if you have a lump sum to invest and you are clear on your investment timeframe and level of risk then you should invest immediately. The long term trend of stock markets is always upwards so even if you do suffer a fall as soon as you invest it is highly likely over time your investment will recover and more. Also don’t forget that even if your investment does fall you are still earning dividends and interest which if re-invested will be purchasing more shares at a cheaper price.
If however, you only have an amount of money available on a regular basis then it makes sense to invest this money every month rather than build it up in cash and invest in one go.
Whichever route you choose there is no guarantee one way is better than the other it’s all about giving you the best chance of achieving your investment goal.
If you would like some help designing an an investment portfolio that will give you the best chance of achieving your goals give us a call. It won’t cost you anything to have a chat. You can also download our ‘Simply Investing Guide’ below.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
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