Wealth Management & Financial Planning

Wealth Management & Financial Planning

Lump Sum Investing

Do as I say not as I do! There are two schools of thought on what to do with a large single payment regarding investing. The math clearly states you are better off to invest the lump sum rather than put in money over time. The key is your holding period or how long until you need to pull funds out of the investment.

Defined contribution plans like 401k’s are based on Dollar-Cost Averaging (DCA) where the money goes in regardless of market valuation. In periods of great volatility like 2008 DCA beat lump sum investments that were made earlier in the year. That is a hard example, but it is one you need to consider.

Dollar-Cost Averaging has another issue: it is hard to buy a crashing market. People who had put money in every month for years stopped their contributions or changed their allocations and missed the opportunity to buy shares on the cheap. The fear of markets going to zero isn’t realistic and yet that is how the human mind feels when their retirement seems to be melting away.

Because the market is up over time the math says you should invest the lump sum at one time assuming your holding period (the time before you need any income) is long enough and your ability to stick to an investment discipline is intact. That doesn’t mean that is why even those “in the know” would do.

Harry Markowitz won the Noble prize for being a part of creating the concept of Modern Portfolio Theory and the Efficient Frontier. The concept was how do we design a perfect portfolio of risk and reward. Markowitz poked fun at himself for knowing what he should do, but still couldn’t get himself to do it.

Individuals will always move away from fear quicker than they will opportunity. The discussion over lump-sum investing is always around the market's downside but you have to pay attention to the other risk: a massive market upside. You have to know how much “missing out” you can accept.

Capitulation is a term generally used on the negative side of the market. Volatility – similar to this past week – persuades many investors to “capitulate” and sell all their investments and head for the sidelines. This rarely goes well as you have to be right twice. You have to get out of the way of a falling market by selling and you have to be willing to buy back in before the eventual market rise. As an example, few people got out in 2008 and back in early 2009.

We witnessed as people stayed in cash in the run-up of the late 1990s almost cheering for a crash or that Y2K would make the investors look silly. Sadly they “capitulated” into the market in January and February of 2000 right before the crash occurred. Only you know you. Follow your discipline and be true to yourself.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

Want to sign up to receive the Market Carver?

Schedule a "Next Steps" Meeting

If you request a “Next Steps” meeting, we will discuss with you things you should do today, things to consider tomorrow, and if we choose to partner together… a written plan on what Financial Enhancement Group can do to help meet your goals.

Receive Our Free weekly Market Update Video

The FEG team regularly shares pertinent financial information to help educate our friends and families on what’s happening in the market, as well as information on financial planning. Fill out the form below to be added to our list for distribution.

Access all of our checklists!