Lump-Sum Investing

Investors often face this choice when they receive a large amount of money, such as an inheritance, a bonus or the proceeds of selling a property. They can invest it all immediately or drip it into the market gradually through dollar-cost averaging.

Because markets have historically tended to rise over time, investing a lump sum immediately has, on average, produced higher returns than spreading it out. Money that waits in cash misses the market's growth during the waiting period. Studies of past market data in several countries have found lump-sum investing came out ahead in roughly two-thirds of periods, though results vary by market and time.

For example, an investor with 60,000 might invest it all today, or invest 5,000 a month for twelve months. If the market rises steadily over the year, the lump sum does better. If the market falls sharply soon after, spreading the investment would have reduced the loss.

The main drawback of lump-sum investing is emotional. Investing everything just before a large fall can be painful and may lead investors to panic and sell. For people who would struggle with that risk, spreading the investment may be a reasonable compromise.