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What's better - lump sums or regular contributions?

16 June 2021

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Question by Mariana


Could you give advice to a conflicted middle aged potential investor please?

Having never invested before but now feel ready and very confused by conflicting information with regard to feeding in or buying straight in for a lump sum.

Feeding in makes sense in many ways with lots of years ahead, but later in life with something to invest the timeline is more acute.

Thanks for such a wonderful straightforward site!

Answered by Catherine Morgan

Hey! Ok so the answer depends largely on 3 main questions. Can you tolerate a single contribution investment? What is the purpose of the investment? How much time do you have for your investing journey?

Can you tolerate a single sum investment? Do you have enough cash in place to cover your expenses and lifestyle for the next 3-5 years? If so, then you can continue to explore both options.

There is some evidence by Interactive Investor to show that investing as a lump sum will net you a better return in the longer term, i.e 20 years as you are essentially fully invested in the markets for longer rather than drip feeding it in. A Vanguard study actually showed that investing a lump sum outperforms dollar-cost averaging 64% of the time over six months and 92% of the time over 36-months, assuming a 60%/40% portfolio of stocks and bonds. So if you are middle aged you may feel more resistant to considering this as a time horizon.

Many investors find that they are more tolerant to drip feeding into the market as this does not fully commit the money on one single day to the market and particularly when markets are volatile. It also helps to reduce the risk and the fear of investing at one time. However volatility can also present opportunity! Don’t forget that you could split your contribution into quarterly or perhaps half yearly contributions. It isn’t just an either or one off or monthly.

Whenever I speak with clients about investing, I always ask them what is the purpose of this investment? If it is for a specific occasion such as a house purchase in the future then you can work out the capital risks versus the timeframe risk. However if you are investing for “better returns” than cash which for many investors this is the motivation, then ask yourself when do you need to have access to the money?

So there is no right or wrong, but weigh up the purpose, the time you have for the money to remain invested and the conditions of the market. Remember there is no perfect time and there is no perfect answer. Time in the market is more important that timing of the market. Human behaviour is an interesting one here as we are often driven by herd mentality (following the crowd) and by the fear of loss. Loss aversion shows that we feel the pain of a loss twice as much as the joy of the investment gain. I am a big believer in setting and forgetting, which makes it easier to make a decision, commit the money with a specific purpose and consider the level of volatility that you are comfortable with. Hindsight bias will always come out to play! “I wish I had done this…” So once you have made the decision, congratulate yourself for making that decision and enjoy the experience.

Answered by

Catherine Morgan

Certified Financial Coach

Catherine has a passion for educating women around the behavioural and practical aspects of money. She is a Mum of two and founder of The Money Panel, a money guidance business for women, helping to support them in managing their personal and business finances. She's was nominated as a finalist in the Women in Financial services award 2018, and works as a regulated financial planner.