You want to invest a lump sum but aren’t entirely sure what it is, how it works and if it is the right strategy. In this article we will explain in simple terms how you can easily in vest a lump some of money into an asset of your choice.
Table of Contents
Points to Know If you want to invest a lump sum:
- Dollar-cost averaging spreads the risk of investing.
- Lump-sum investing gives your investments exposure to the markets sooner.
- Your emotions can play a role in the strategy you select.
How to invest a lump sum
Investing a lump sum is straight forward and shouldn’t confuse you too much.
- Do extensive research on your own or consult a professional financial adivsor
- Compare the right investment and saving strategies
- Decide which asset you like to purchase
- Register a broker account
- Purchase the asset
The Lump-Sum Approach vs. Dollar-Cost Averaging
Suppose you received a windfall – someone gifted you money, you inherited a substantial amount, or perhaps you have gained a saving balance or got a huge bonus. Now, you have a crucial decision to make: Should you invest all the money right away, or should you invest it gradually in smaller increments using a strategy called dollar-cost averaging?
All at Once… Investing all of your money at once has its advantages:
- If you invest a lump sum, you’ll gain exposure to the markets as soon as possible.
- Historical market trends suggest that returns on stocks and bonds tend to exceed returns on cash investments and bonds.
- When markets are on an upward trend, investing your money immediately allows you to fully benefit from market growth.
- With assets such as Bitcoin, research shows that lump sum often outperforms DCA.
…Or Slow and Steady On the other hand, dollar-cost averaging might be more suitable if you want to:
- Minimize the downside risk of making a large investment all at once.
- Take advantage of the market’s natural volatility by buying shares at lower average prices.
- Avoid feelings of regret if the market experiences a downturn after you invest.
- Great strategy to use for monthly savings
What the Research Says
Our research indicates that it’s prudent to invest a lump sum immediately.
Markets Going Up… When the markets are trending upward, it makes sense to implement a strategic asset allocation as soon as you can.
History shows that investors who take such risks have been rewarded with positive long-term returns that should be greater than the expected return of cash investments.
…But What if They Go Down? You might be concerned about investing a significant sum of money all at once and then experiencing a market downturn shortly afterward. In that case, dollar-cost averaging may be the strategy for you. In other words, if you don’t want to have any regrets and want to minimize the downside risk, this approach can be more appealing.
However, remember to weigh your emotionally based concerns carefully against what the research shows:
- Cash investments typically have lower expected long-term returns compared to stocks and bonds.
- Delaying investment is, in itself, a form of market-timing, which few investors succeed at.
Lump Sum Investing – Conclusion
Most investors agree, it’s better to put the money at work if you can. If you want to invest a lump sum, you’re often better off to do it all at once. However, bear in mind that you need to diversify if you have to manage a larger portfolio.
Smaller investors can still invest a lump sum without diversifying too much. Once you figured out the right investment or savings vehicle, you just have to to purchase the initial amount.