We received a question the other day.
One we get quite often - around how to invest large sums of money.
Should it be invested gradually?
Or all at once?
Working with many wealthy professionals, they often have large lump sums to invest.
Annual bonuses, sale of assets (businesses, houses, investments) or inheritances for example.
This means they have important decisions to make.
So here’s my response.
After which, I’ll show you the shocking cost of delay.
Your perfectly intuitive response is to want to stage the money into the market over, let’s say, 12 months.
The problem comes when you consider, in all the rolling 12-month periods since the beginning of 1926, the market’s return with dividends reinvested has been positive about 75% of the time.
Therefore, for your strategy to yield a superior outcome, these next 12 months have to turn out to be the one period out of four where the market produces a negative return.
Put simply, the day you start your 12-month programme of gradual investing, the odds of it working are 3 to 1 against you.
And it gets worse.
Because as time leaches the volatility (the temporary declines) out of equities, the odds against profiting through your strategy get longer.
As you move into the 24-month or even 36-month periods, the results are close to 84% positive.
Meaning you’d have a 16% chance of being “right”.
The longer the staging-in period you choose, the greater the odds are against you.
And that’s the rigorously correct analytical answer.
Unlike a traditional banker, broker or adviser who will give you sales aids and graphs about ‘dollar cost averaging,’ it’s why I'd never recommend gradually investing your lump sum over time.
I appreciate this wisdom is likely counterintuitive to your natural feeling but if you don’t trust the empirical evidence then why not trust Warren Buffet who said, "Somebody’s sitting in the shade today because someone planted a tree a long time ago."
In the same breath, I don’t minimalise the emotional stress you’re bound to feel if you chose the ‘wrong’ time to invest. But I have to stand firmly on the great truth that in the long run, there is no wrong time to invest in mainstream equities.
I hope this helps.
Another point I didn’t mention to John was the cost of delay.
Hesitation can be expensive.
Regardless of how the market is doing – the longer you’re invested, the greater your returns will be.
And I’ll prove it.
I met a prospect in April 2020.
Understandably this was a difficult period for investors who were witnessing some of the greatest market swings in history.
This investor, let’s call him Mark, got nervous and questioned when to invest.
Eventually, he invested his money in August 2020.
But here’s the thing.
Had he invested in April 2020, just four months prior, he would have had achieved 65.95% more growth.
Compared to the 25.45% he has now.
A difference of 40.5%!
In numerical terms…
His £1,000,000 investment would have been worth £1,659,500 just one and a half years later.
Few people appreciate this cost compounds each year until retirement.
By the time Mark is 65 the difference will be many millions.
The true cost being felt in the adjusted hopes and dreams of his family and legacy.
Granted, 2020 was an extraordinary year, but the argument still remains.
Invest sooner rather than later.
Timing is meaningless; time is everything.
And there’s no better time than today.