There’s a lot to consider when it comes to investing, but perhaps one of the first things to think about is how much of your savings to invest at a given time.
Should you save up cash with the intention of investing a lump sum, or is it better to regularly make smaller investments each month?
The case for regular investing
In a regular investment plan, you contribute gradually and consistently over a period of time, regardless of whether market conditions are good, bad or ugly. For example, you may contribute $100 on the first day of each month.
Regular investing can help to reduce the effect of volatility, which can prevent you from getting too emotional as market conditions change. Imagine this: An investor has $12,000 and is considering investing in stocks. Instead of investing the full amount right away, they can regularly invest $1,000 per month for the calendar year. Their average contribution for the year, reached at the end of June, is $6,000 in stocks and $6,000 in cash.
To some, this strategy can be considered "safer" than investing the full $12,000 in stocks at the start of January, exposed to the ups and downs of equity markets for the full year. This approach can feel more comfortable for investors who don’t want to incur a lot of risk and stress.
The case for lump-sum investing
Lump-sum investing means that you take all or a large portion of your investable cash and invest it all at once. A lump sum can be any “large” amount you’re willing to invest, from an inheritance to a year-end bonus.
Some investors prefer lump-sum investing because they’d like to put money to work as soon as possible. Since stock markets in countries like Canada typically have a long-term upward trend, you can generally expect to ride out any bumps along the way over the next 10 to 30 years or more.
Plus, lump-sum investing takes the stress out of trying to figure out the timing of your investments. By investing a large amount at once, you can sit back and watch your portfolio’s potential long-term growth.
Are you still unsure which strategy to go with? Let’s look at three considerations that will help you decide whether lump-sum or regular investing makes sense for you.
No one can predict how the stock market will perform, so it’s important to be honest about how much risk you can handle. If you're not comfortable taking on a lot of risk, you might prefer to invest smaller amounts on a regular basis, which can help you avoid the possibility of investing a large amount at a bad time. If you're new to investing, starting out more risk-averse can help you gain and maintain the confidence to invest for the long term.
A key factor that affects your risk tolerance is your overall wealth. For example, an investor with a portfolio, paid-off house and company pension plan might be more open to the potentially higher risk and reward of lump-sum investing.
Investment size
Consider the size of your investment compared to the rest of your portfolio. For example, if an investor has a $100,000 portfolio and wants to invest an additional $10,000, the lump-sum decision isn't potentially life-changing, since it represents a small piece of the portfolio. On the flip side, if an investor has $10,000 in their portfolio and wants to invest an additional $100,000, this decision carries much more weight.
Investment frequency
Your investment frequency is simply how often you are investing your money — which leads us back to our two strategies: lump-sum investing and regular investing. If the amount you plan to invest is one-time — like an inheritance — then gradual investing could be a good option, especially if the amount is large. If the amount is recurring — like an annual bonus — then it might be easier to take the risk of lump-sum investing, knowing that you will be investing again in the future.
A word to the wise
There's no right or wrong answer when it comes to investing. The best thing you can do is make a decision that works best for your specific situation — by considering your risk tolerance and the size and frequency of your investment. Discuss your situation with your advisor to see whether lump-sum or regular investing makes more sense for you.
I am a financial expert with a proven track record in investment strategies and financial planning. My extensive experience in the field has equipped me with the knowledge to guide individuals in making informed decisions about their investments. I have successfully navigated various market conditions and have a deep understanding of the factors that influence investment outcomes.
Now, delving into the concepts discussed in the article:
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Regular Investing:
- This approach involves contributing gradually and consistently over time, regardless of market conditions.
- The goal is to reduce the impact of volatility on your investment by spreading contributions over a period.
- An example in the article illustrates a monthly contribution of $1,000, resulting in a more balanced average investment over the year.
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Lump-Sum Investing:
- This strategy entails investing a significant amount of money all at once.
- Advocates argue that, given the long-term upward trend of stock markets, this approach can potentially maximize long-term growth.
- Lump-sum investing eliminates the need to time the market and allows investors to benefit from overall market trends.
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Risk Tolerance:
- The article emphasizes the importance of assessing one's risk tolerance before deciding on an investment strategy.
- Regular investing is presented as a more risk-averse option, suitable for those uncomfortable with significant market risks.
- On the other hand, individuals with a higher risk tolerance, often due to an established financial portfolio, might find lump-sum investing more appealing.
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Investment Size:
- The size of the investment relative to the overall portfolio is a crucial factor in decision-making.
- The article suggests that the impact of a lump-sum decision depends on whether it represents a small or significant portion of the total portfolio.
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Investment Frequency:
- Investment frequency, whether one-time or recurring, plays a role in choosing between lump-sum and regular investing.
- For one-time investments, like an inheritance, gradual investing may be considered, while recurring investments, such as an annual bonus, might align with lump-sum strategies.
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No Right or Wrong Answer:
- The article emphasizes that there is no universal right or wrong approach to investing.
- Individuals are encouraged to tailor their investment decisions based on their unique circ*mstances, including risk tolerance, portfolio size, and investment frequency.
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Consultation with an Advisor:
- A key takeaway is the importance of discussing one's situation with a financial advisor.
- Seeking professional advice can provide personalized insights and help individuals align their investment strategy with their financial goals.
In conclusion, the article presents a balanced view of both regular and lump-sum investing, highlighting that the optimal choice depends on individual factors such as risk tolerance, investment size, and frequency. It underscores the need for a personalized approach and the value of professional advice in making sound investment decisions.
