This is a very interesting topic and I get asked this question quite often, so I decided to do a post about it. The million-dollar question is – should I do a lump sum investment or dollar cost average over a period of time?
To invest all at one go, or not?
Lump Sum Investing basically takes all your available investable capital and investing all of it at one go. You may choose to buy a mix of different asset classes (e.g. bonds, stocks, commodities) but the key is everything is bought at the start. The worst that can happen is that the market crashes right after you invest.
Dollar Cost Averaging takes your investable capital and splits it into several portions – you invest bit by bit, perhaps months or years apart. The worst that can happen is that the market rises significantly after you invest your first allocation, and you miss out on all that return.
With this in mind, I believe that the best time to do a lump sum investment is when the economy is bullish, and conversely, to dollar cost average when the markets are bearish. A Vanguard study shows that on average, an immediate lump-sum investment has outperformed systematic implementation strategies across global markets as markets tend to trend upwards. But systematic investment provides some protection against regret, although historically, the trade-off is often lower returns.
Why waiting is worst
Sometimes, we often find ourselves waiting for the right moment to invest. The problem is that there is never the right moment because you can never find the bottom of the market. When prices are falling, you will hold off the purchase because you are afraid it falls further. Psychologically, you will be too afraid to catch a falling knife. When prices are rising, you tend to hold back your purchase because you would wait to buy it at a lower price, but prices usually tend to keep rising instead, and you never buy.
But investing is a personal decision
There is no right or wrong way to invest, as we all have different risk profiles. Most of us tend to be more risk averse, and hence, spreading out our investment minimises risk and is the preferred method. Stay safe in the markets!