Going all in?

When working with clients on their investing and retirement planning, we get to the practical part of investing the funds into the recommended portfolio of assets.

This leads to the inevitable question of do we invest the total amount now or average the proceeds over time?

The pros and cons are of this are as follows:

Lump Sum – Investing the total amount now.

Pros:

1. Immediate Market Exposure - you immediately gain full exposure to the market. This can be beneficial if the market is on an upward trend.

2. Potential for Higher Returns: Historically, markets tend to rise over time. Investing a lump sum allows you to take advantage of this growth potential from the start.

3. Simplicity: A one-time investment is straightforward and requires less ongoing management.

Cons:

1.Market Timing Risk: Investing a large sum at once can be risky if the market declines shortly after your investment. This can lead to significant short-term losses.

2. Emotional Stress Watching a large investment fluctuate can be stressful, especially during volatile market periods.

3. Opportunity Cost: If the market is overvalued at the time of investment, you might miss out on better opportunities later.

Dollar-Cost Averaging - Average the proceeds over time

Pros:

1. Reduced Market Timing Risk: By spreading your investments over time, you reduce the risk of investing a large sum at the market's peak.

2. Emotional Comfort: Regular, smaller investments can be less stressful and easier to manage emotionally.

3. Discipline: This strategy encourages a disciplined approach to investing, which can be beneficial for long-term financial planning.

Cons:

1. Potential for Lower Returns: If the market is generally rising, dollar-cost averaging might result in lower returns compared to lump sum investing.

2. Complexity: Regular investments require more ongoing management and can be more time-consuming.

3. Missed Opportunities: the market experiences a significant rise; you might miss out on potential gains by not having invested a larger sum earlier.

So, this provides some food for thought but what do the historical numbers tell us. By using the S&P 500 over the last 10 years and a lump sum of $1,000,000 and the return each year from 2015 to 2024 we would arrive at a value of $3,091,000. Compare this to investing $200,000 at the beginning of each year for the first 5 years (2015-2019), your investments at the end of 2019 would be $1,511,522. Then after the next 5 years of subsequent returns (2020-2024), you would have a total of $2,930,100.

So, in this scenario, lump sum investing would have resulted in a higher return compared to dollar-cost averaging. However, important to note that lump sum

investing carries a higher risk due to market volatility, while dollar-cost averaging can provide a more stable and less stressful investment experience.

Which Strategy is Right for You?

The choice between lump sum investing and dollar-cost averaging depends on your individual circumstances. If you have a high-risk tolerance and believe the market will continue to rise, lump sum investing might be the better option. On the other hand, if you are concerned about market volatility and prefer a more conservative approach, dollar-cost averaging could be more suitable.

Ultimately, the best strategy is one that aligns with your financial goals, risk tolerance, and investment horizon. Consulting with a financial advisor can also provide personalised guidance tailored to your specific situation.

Ensure you have the strategy that is right for you. Collinson Wealth Partners is here to assist you when this question arises.

Disclaimer

The information contained in this publication is general in nature and is not intended to be personalised financial advice. Before making any financial decisions, you should consult a professional financial adviser. Collinson Wealth Partners FSP 743091 believes the information in this publication is correct, and it has reasonable grounds for any opinion or recommendation contained in this publication on the date of this publication.