Comparison of investing lump sum and diversifying it over time

Texas News Today

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If you have a lot of cash to invest, you may be wondering whether everything should work right away or diversify over time.

Whatever the market is doing, investing in lump sums rather than rolling the money at regular intervals is likely to result in higher balances (dollar cost averaging) in the future. Is known). Northwestern Mutual Wealth Management Show.

Its outperformance applies regardless of the combination of stocks or bonds you invest in.

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“If you look at the probability that the cumulative value will be higher, you can see that it is quite large when using lump sum investments. [approach] Dollar cost averaging method. Matt Stakey, senior portfolio manager for equities at Northwestern Mutual Wealth Management.

The study looked at a 10-year rolling return of $1 million beginning in 1950 and compared the results of an immediate lump sum investment with the dollar cost averaging method (in this study, investing $1 million evenly over 12 months). to be done). and then for the remaining 9 years).

Assuming a 100% equity portfolio, the rate of return on a lump sum investment exceeds dollar cost on average 75% of the time. For portfolios with 60% equities and 40% fixed income, the outperformance rate was 80%. In addition, a 100% fixed income portfolio outperformed dollar cost on average 90% of the time.

The average outperformance of lumpsum investments across the entire equity portfolio was 15.23%. It was 10.68% for the 60-40 allocation and 4.3% for the 100% bond.

Even when the market is hitting new highs, the data suggests that better results in the future mean your money works together, Stuckey said. Also, choosing the dollar cost averaging method rather than investing a lump sum would be the same as the timing of the market, regardless of market performance.

“There have been times in history when we felt the market was moving,” Stuckey said. “But timing the market, whether personal or professional, is a very challenging strategy for successful implementation.”

However, the dollar cost averaging method isn’t a bad strategy, he said. Typically, 401(k) plan account holders do this through salary contributions throughout the year.

Also, it’s a good idea to familiarize yourself with risk tolerance, for example, before putting all your money into stocks at once. It’s basically a combination of how well you sleep at night when the market is volatile and how long it takes to get money. The construction of a portfolio, a combination of equities and fixed income, should reflect its risk tolerance, regardless of where the money is spent.

“From our perspective, we are looking at a 10-year period in our research … and market volatility will remain stable during that period, especially for a 100% equity portfolio,” Stuckey said. .. “It is better to be strategic than to realize later that the risk tolerance is very different,” he said.


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