Lump-sum investing or regular investing

This article was first published in our Direct Investor Magazine on 3 August

On paper, lump-sum investing has a strong case. If markets rise over time, having more of your money invested from the start is clearly an advantage. Drip-feeding your funds into markets over time can feel like a more comfortable way to dip a toe in, but it means cash stays dry for longer. And if markets rise while you wait, you’ve missed out.

What the evidence says

Studies using broad stock market data have found that lump-sum investing beats regular investing more often than not – on average, around 75% of the time, depending on the market, time period and how gradually the money is phased in. That’s because markets spend more time rising than falling, which is the basic reason people invest in the first place.

But that’s not the end

The problem with averages is that nobody actually gets the average. We all start our investing journeys at different moments. Some of us at good moments. Some of us at bad moments. 

Can you imagine investing a lump sum the week before the Dot-Com crash, the Global Financial Crisis or the initial pandemic-induced Covid sell-off? Ouch. And going forward, you can bet your bottom dollar there will be more shocks.

So, an unlucky investor would be forgiven for questioning their decision to jump in all at once. Even if the long-term case remains strong, that first fall can cause disproportionate stress. Behavioural economists Kahneman and Tversky say “losses loom larger than gains.” And it’s very true. A sharp fall just after investing can feel more urgent and important to stop than the long-term evidence to stick it out.

That’s why investors stop making their regular contributions, retreat to cash or sell – because it feels sensible. But this is often just market timing by another name, which is speculative, and something we advise against. When the investor gets over the loss and feels confident again, usually markets have made their recovery, and rebound gains have been missed.

So, what’s the verdict?

If you feel nervous about investing a lump sum all at once, you could consider taking a staggered approach. Spreading a lump sum over, say, six or 12 months can be a good way to avoid the risk of committing everything and then feeling as though you’ve been capsized if you hit a big wave. 

You’ll buy at various levels. And sure, that’s unlikely to make you better off, as the data shows. But it can make the plan easier to follow. After 10, 20 or 30 years, that may matter more than whether you were lucky or unlucky in picking your entry point.

Studies using broad stock market data have found that lump-sum investing beats regular investing more often than not – on average, around 75% of the time, depending on the market, time period and how gradually the money is phased in.