If an investor has a large amount of cash, should they invest it all at once, or stagger their purchases over time? Those that argue against lump-sum investing will say there is a chance that prices will crash after the investment is made. If the investment was staggered, not all of it would decline in value, and the rest could be invested later at lower prices.
Those that argue for investing the lump sum will say that time in the market is more important than trying to time the market. The longer you are invested, the better, according to this school of thought.
What the head says
The annual total return (including dividend reinvestment) for the FTSE 100 over the years 2009 to 2018 was as follows:
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
| 27.3% | 12.6% | -2.2% | 10.0% | 18.7% | 0.7% | -1.3% | 19.1% | 11.9% | -8.7% |
Investing a £1,000 lump sum at the beginning of 2009 would have meant ending up with £1,858.65 at the end of 2018.
Compare that with investing £100 at the start and an additional £100 each year. The total investment is still £1,000, but worth just £1,215.50 at the end.
How about if dividends are not being reinvested? Annual price returns (no dividend reinvestment) for the FTSE 100 over the same period are shown in the table below.
| 22.0% | 8.9% | -5.6% | 5.8% | 14.4% | -2.7% | -4.9% | 14.4% | 7.6% | -12.5% |
Going all-in with £1,000 at the start means having £1,512.90 at the end. Splitting the investment into £100 chunks means ending with just £1,215.27. Lump-sum investing wins again.
How about for an individual stock? In a previous article, I looked at putting a £1,000 lump sum in shares of Anglo American in 2009. I found that the investment grew to £1,053.10 over 10 years when dividends were reinvested.
Running a hundred simulations of staged investments in Anglo (up to a total of £1,000), the ending wealth was £595 on average. On one occasion the lump-sum investment was beaten, by just over a pound. Still, in the vast majority of cases, a lump-sum investment would have been the winner.
What the heart says
Vanguard, an investment advisor, looked at investing in a stock and bond portfolio in the US, UK, and Australian markets. This work, titled “Invest now or temporarily hold your cash”, was much more comprehensive than my examples, but it also suggests the lump sum beats staggered investing in the majority of cases.
The report does acknowledge that delaying a portion of an investment can protect against feeling regret if there is a dip in price soon after. The grief would be worse if the lump sum was relatively large or was the only money that was available, ever, to be invested.
However, the trade-off for protection against regret is a lower return in the majority of scenarios.
Lumping it on
If it’s a large sum of money or the only wealth that will ever be available for investing, then I would recommend taking financial advice.
For the smaller cash piles that pop up from time to time, and where investing will be ongoing, I say lump-sum investing is the way to go.
An income investor looking to build up their holdings of quality, dividend-paying stocks, like GlaxoSmithKline or Unilever, can only reinvest dividends if they are earned in the first place. Simply being in the market, given the fact that it tends to go up over time, has been shown to earn a better return than you would get sitting on cash.