I have a lump sum of €45,000 that I want to invest. I don’t want to leave it in the bank. I’m going to get advice, but I’m just curious as to whether to invest it all in one go, or in smaller amounts over a longer timeframe?
Are there benefits or risks to both? What would you do yourself? Any other advice would be appreciated.
– G Fitzgerald, Limerick
Investing is a bit like flying: it’s worth paying special attention to take-off and landing.
Mid-flight, things are easier. 150 years of evidence says that our money will grow over the long term when we invest. Once airborne, we know we can cope with some ups and downs; we buckle up and sit it out.
But if turbulence hits before the wheels are up, you can be off-course from the start.
That’s why we generally recommend investing lump sums over a period of between two and six months. That way, you’ll strike a balance between spreading the price at which you invest, while also putting your money to work in productive assets reasonably quickly.
How will this work out in practice? Clearly, one of two things will happen while you invest your lump sum.
Markets could go down. If that happens, you will have saved money by investing in a measured way. Think of it as buying during a sale: you’re getting the same item as before, but at a cheaper price.
If markets go up, it’s true you will have sacrificed some return. But you will have done so in order limit your short-term timing risk.
Some academics say that because markets rise over time, the sooner you get in, the better.
But we know that’s not how investors feel about their money. In the real world, you rarely have total control over timing. What if the day you invest your money is the day market sentiment changes?
Drip-feeding your money over a few months helps protect against that risk.
There are several ways to go about it. You could split your lump sum into three chunks of €15,000, each invested a month apart. Some providers will automate the process.
Or you could out some of your money in lower-risk assets and increase exposure over time.
Whichever route you choose, investing isn’t only about maximising returns. It’s about avoiding unnecessary risks and heartache along the journey.
So open the throttle gradually. You’ll soon reach cruising altitude.
This article is adapted from a piece we recently wrote for the Sunday Times.