Is it better to invest a windfall all at once or a bit at a time?

Savvy investors are familiar with the concept of dollar-cost averaging — investing smaller amounts at regular intervals. You buy more shares or fund units when prices are low and fewer when prices are high, reducing the average cost of your investments over time. Another convenient benefit is that regular intervals can match up nicely with your paycheques.

But what if you receive a lump sum from a property sale, inheritance or other windfall? Is it better to make periodic investments or invest the amount all at once?

What the studies say

Lump-sum investing versus dollarcost averaging has been a much-debated topic in the investment world, with studies conducted by such notable firms as Vanguard ¹ and AllianceBernstein.² These studies generally demonstrate that lump-sum investing performs better the majority of the time.

The Vanguard study, for example, compared the two methods using a 60% U.S. stock and 40% bond portfolio over 10-year rolling periods from 1926 to 2011, concluding that lump-sum investing outperformed periodic investing about two-thirds of the time.¹ The explanation for outperformance is that stock markets, historically, rise over time — so a lump sum has more time in the market to benefit from gains.

But lump-sum investing doesn’t always come out ahead. In down periods, dollarcost averaging tends to fare better. Here’s an example to illustrate.

Suppose that you receive a windfall, divide it into 12 equal amounts and make one deposit each month. A short while after your initial deposit, markets begin to drop and continue declining for several months. During this time, you continue to acquire shares, buying more each month as prices drop. Then markets recover. You come out further ahead because your regular purchases at a decreasing price have decreased your average price per share.

Beyond the studies

While historical studies and probabilities may point you to lump-sum investing, other factors come in to play that may have you leaning to a more gradual approach. These include:

  • Liquidity. When you invest in instalments, you will have funds readily available to invest in any new opportunities that may arise or meet unexpected expenses.
  • The anxiety factor. Some investors would be consumed with worry that they’d invested their windfall at the wrong time or selected the wrong investment. Periodic deposits protect you. If markets do fall soon after you invest the first amount, you’ll be thankful you didn’t invest the entire sum. And if markets rise, you’ll be satisfied your investment has gained in value.

We’re here to help you decide whether a lump-sum or periodic approach is better for you, taking into consideration the market outlook, nature of your assets and your investment personality. When all of these factors are accounted for, you can feel confident in whatever choice you make.

¹Vanguard Group, “Dollar-cost averaging just means taking risk later,” July 2012.
²Seth Masters, AllianceBernstein. “Is dollar-cost averaging the cure for market jitters?” July 2014.

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