Lump-Sum Investing 101: Pros & Cons
Investing is as much about strategy as it is about the actual assets you choose. There may be times when we find ourselves with a large amount of cash in excess of what is needed for any emergency fund. This could be the result of an (un)expected windfall, such as a bonus, the sale of a rental property, an inheritance, or maybe even a lottery win!
You may be new to investing and simply looking to put the savings you’ve built up over time to work. Whatever the reason, you may face a common dilemma: Should you invest those funds into the market with regular, smaller amounts, OR should you invest it in one single, substantial investment?
In this post, we break down the advantages and disadvantages of the lump-sum investing approach.
What is Lump-Sum Investing?
Lump-sum investing involves investing a significant sum of money all at once rather than spreading it out over time. For instance, if you come into a windfall, inheritance, or have significant savings, you could choose to invest it all immediately rather than periodically through a strategy called dollar-cost averaging.
Pros of Lump-Sum Investing
Potential for Higher Returns: If you invest in a rising market, you stand to benefit from appreciating asset prices on the full amount from day one. If you are investing with a longer time horizon (10+ years), research shows that lump-sum investing tends to outperform breaking up your investment.
The reason: markets go up over time, so staggering your investment can work against you by increasing your average entry price.
Simplicity: There's no need to remember or automate multiple transactions - one significant investment and you're set.
Lower Transaction Costs: Depending on your brokerage or investment platform, you might save on fees by making one large purchase instead of multiple smaller ones.
Cons of Lump-Sum Investing
Potential for a Big Short-Term Loss and Loss of Liquidity. If the market takes a downturn soon after you invest, your portfolio could experience immediate and significant unrealized losses. Statistically, bear markets (where markets experience a drop of 20% or more) happen roughly every 4-5 years. However, predictions as to when the next one will happen regularly fail. Even if your funds were earmarked for long-term investment, having an immediate large slump still hurts your liquidity (the amount of money you potentially have available at any time).
Potential for Lower Long-Term Returns: Investing a large lump sum before a downturn can underperform staggered entry in such situations. This is because your phased investments will take advantage of the slump and result in a lower overall entry point. While the statistics seem to show that lump-sum investments outperform staggered entries about two-thirds of the time, you might legitimately decide that the price of being wrong with a lump-sum can be worse than the more likely long-term underperformance of phased investments.
Emotional Hurdle: Investing a large amount at once can be emotionally challenging. The fear of making a mistake and the pressure to time it right can be daunting - especially if you’re the one handling the entire investment on your own. Seeing a large investment become subject to an immediate market slump can be a demoralizing experience and shake confidence in future investments.
Is Lump-Sum Investing Right for You?
No one has a crystal ball, so we can’t predict which approach—lump sum or phased investing—will deliver better results over the long run. Both are valid strategies, each with trade-offs. Sometimes indicators like price-to-earnings ratios suggest markets might be expensive, and in those moments, we may lean toward a phased entry. Still, even those signals are far from reliable.
The bigger difference lies in psychology. Lump-sum investing can create sharper swings in portfolio value, while phased investing tends to smooth out the ride. And remember, if you’re already investing regularly from savings, you’re effectively phasing in over time, which naturally cushions short-term declines.
Ultimately, these strategies exist for the same purpose: to get money working for you. The real risk isn’t whether you choose lump sum or phased entry—it’s leaving cash on the sidelines and missing out entirely. Focus on the approach that helps you commit and stay invested. A financial advisor can help you craft a strategy that fits your goals and comfort level, giving you the confidence to stick with it.
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