Lump sum or greenback price common?
Investing a large bundle of money means not only deciding what to buy, but when.
When considering whether to invest the money all at once or by making regular deployments at set intervals (also known as dollar cost average), you should be aware that you are more likely to get more credit later by going to Form a lump-sum investment, shows a study by Northwestern Mutual Wealth Management.
This outperformance applies regardless of the mix of stocks and bonds in which you invest.
“If you look at the likelihood that you end up with a higher cumulative value, the study shows that it is predominantly with an investment [approach] compared to the dollar cost average, “said Matt Stucky, senior portfolio manager of equities for Northwestern Mutual Wealth Management.
More from a portfolio perspective
Here’s a look at other stories that impact portfolio planning and retirement planning:
The study examined rolling 10-year returns for $ 1 million from 1950 and compared the results between an instant flat investment and the average cost calculation (which the study assumes $ 1 million invested evenly over 12 months and then for the remaining nine years).
Assuming a 100 percent equity portfolio, the return on investments outperformed the dollar cost an average of 75% of the time, the study shows. For a portfolio of 60% stocks and 40% bonds, the outperformance rate was 80%. And a 100% fixed income portfolio exceeded the dollar cost an average of 90% of the time.
The average investment outperformance for the all equity portfolio was 15.23%. It was 10.68% for a 60-40 allocation and 4.3% for 100% fixed income.
Even if the markets hit new highs – which is the current theme with major indices – the data suggests that getting better in the future still means you have to wager your money all at once, Stucky said. And when compared to investing the lump sum, choosing the dollar cost average may instead resemble market timing regardless of how the markets go.
“There are many other periods in history when the market felt high,” said Stucky. “But market timing is a very challenging strategy that has to be implemented successfully, be it by private investors or professional investors.”
However, he said that averaging the dollar cost is not a bad strategy – in general, 401 (k) plan account holders do just that through their year-round paychecks.
Before investing all of your money in stocks, for example, you should also familiarize yourself with your risk tolerance. That’s basically a combination of how well you can sleep at night during times of market volatility and how long it will be before you need the money. Your portfolio construction – that is, the mix of stocks and bonds – should reflect this tolerance for risk regardless of when you put your money into it.
“From our perspective, we’re looking at a 10-year time horizon in the study … and market volatility during that time will be constant, especially with a 100% equity portfolio,” said Stucky. “It is better if we have expectations of a strategy than to find out afterwards that our risk tolerance is completely different.”