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Lump sum investing versus drip-feeding

We’re often asked: Is it better to invest a big lump sum of money all at once, or to drip-feed your cash into the market?

And there happens to be an easy answer…

Statistically you’re more likely to boost your returns by going all in at once.

A Vanguard paper titled Dollar-cost Averaging Just Means Taking Risk Later found that lump sum investing beat drip-feeding around two-thirds of the time in the UK and US.

This was true across multiple decades and asset allocations – because more often than not equities and bonds trump the returns from cash.

Here’s a snapshot of Vanguard’s findings:

Lump sum investing wins in the UK, US and Australia

Many other studies have shown the same thing.

The logic is simple. Equities beat cash. Bonds beat cash. (Eventually!)

Equities and bonds are riskier asset classes than cash and investors can expect to be rewarded for bearing that risk. Historically this has come to pass. Over most time periods your investments will therefore beat your bank account.

So the sooner your money is cast into the market, the more likely it is to benefit from the greater potential of equities and bonds to grow.

Indeed, the longer you spend drip-feeding (or pound-cost averaging1), the more likely it is that you will pay for your caution as your cash returns are outshone by the fizzing fireworks of equities.

Yes but, no but…

Wait – what about that one third of the time when drip-feeding wins?

Well, you’ll be glad you chose to drip-feed if the market relentlessly falls over the course of your 12 easy installments. This way every time you buy a punnet of equities, you’re buying them at a cheaper rate than the last time.

You’ll also be glad if, in a parallel universe, you’d have been that shell-shocked investor who threw in your whole £200,000 lot at once and then watched it shrink in a bear market crash like Lake Chad in the face of a population explosion.

So the real question is not about returns. It is could you handle it if luck was against you and your inheritance or bonus or compensation payout – your one life-changing windfall – got vaporised by 50% in a matter of months?

It’s monkey in the mirror time again and drip-feed investing works because it helps prevent that person from going nuts.

I’ve been there

Many first-time investors hang around the edge of the investing pool, unable to dive in.

I know I did.

I couldn’t bear the thought of watching my maiden punt lose – even though my rational brain knew that it didn’t matter because I was committed to investing for the long term.

Every piece of bad news heightened my dithering because, well, if I waited a bit longer then maybe I could buy a little cheaper… but really I just didn’t want to see my money tank.

It was an inauspicious start for a guy who doesn’t believe you can time the markets.

Market timing is not your friend

It’s precisely because we can’t predict the markets that drip-feeding is a useful psychological tool.

We can gather all the opinions we like, check out the P/E ratios and fret about geopolitics, but that kind of rune-reading is little better than superstition. It might salve a troubled mind but it makes no difference to the outcome – which is decided by a game of chance.

Drip-feeding breaks the brain-jam because it promises to cushion risk averse investors against the (less likely) downside.

If the market moves against us early on, then at least we’re not fully exposed, and later drips will buy more shares at a cheaper price.

So drip-feeding (aka pound-cost averaging) is useful, but it’s useful as a psychological crutch, not because it’s likely to boost returns. It isn’t.

If you think drip-feeding is the best way forward for you, there are various methods to try. You might consider investing equal installments over:

  • 12 months (never longer according to maths professor Bill Jones)
  • Six months
  • Four quarters

Or else put in half now and half over the next six months.

Passive investing writer Rick Ferri also has some interesting ideas on drip-feeding techniques, including favouring pound-cost averaging if your cash heap is worth more than 20% of your current wealth.

Your bottom line

Remember, the potential difference in outcomes between lump sum investing and pound-cost averaging is the performance of the market versus cash over your drip-feeding period.

We saw that according to Vanguard’s paper, the lump sum approach wins two times out of three.

But by how much? Well:

In the United States, 12-month dollar cost averaging led to an average ending portfolio value of $2,395,824, while lump sum investing led to an average ending value of $2,450,264, or 2.3% more.

The results were similar in the United Kingdom and Australia: UK investors [who chose lump sum investing] would have ended with 2.2% more and Australian investors with 1.3% more, on average.

Personally, if I doubted my risk tolerance then I’d choose the technique that was more likely to keep me in the game, rather than stretch for 2.2% upside.

That’s because the worst outcome is panicking in the face of a bear market, selling at the bottom, and then being scared off investing for life.

Take it steady,

The Accumulator

P.S. Remember this question has nothing to do with pound cost averaging from a regular income like your monthly salary. That’s just an accident of circumstance. Your money arrives as a series of monthly lump sums, and you’ll buy more equities on the dips and less on the highs. But, as market timing is not consistently possible, you’re best off investing it as soon as you can.

  1. Or dollar-cost averaging as our US chums would have it []

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{ 57 comments… add one }
  • 51 ermine December 6, 2019, 9:31 am

    > I’m curious what others make of it.

    I like the idea. I currently have the PCLS lump sum, which is the last lump sum investment I will ever make; my investing career will end after that. Although I have invested from this into my ISA allowance I really struggle with the idea of investing the remaining amount of it, is it is parked with NS&I premium bonds at the mo.

    The markets are in a long bull run that is long in the tooth, many macro indicators are showing high risks of a downturn, valuations are high.

    So buying into something more conservative like bonds next year has a lot of attraction, because it is high time that this bull market meets its Waterloo

  • 52 The Investor December 6, 2019, 10:46 am

    The markets are in a long bull run that is long in the tooth, many macro indicators are showing high risks of a downturn, valuations are high.

    So buying into something more conservative like bonds next year has a lot of attraction, because it is high time that this bull market meets its Waterloo

    I’d be wary of this sort of thinking (as you know). Even in the US this bull market isn’t particularly ancient, and most of the early years were bouncing off a low base. Here in the UK the market has been positively stagnant!

    Also — and this isn’t a dig but for the benefit of ingenues to our own Mr Money Mustilid 😉 — the fact that you’ve been voicing similar sentiments for I’d guess four or five years now should give us pause.

    Anything could happen, starting today, of course. Bull markets don’t go on for ever.

    But equally they don’t die of old age.

    Most people who want an easier enriching life should find their best-guess risk tolerance and then try to avoid speculation, but rather run the plan. 🙂

    (Neither you or I will ever approach the markets this way, but that doesn’t make it right and the ethos of this site compels me to warn less experienced readers accordingly. 🙂 )

  • 53 The Rhino December 6, 2019, 11:01 am

    In much the same way TI called the top of the housing market by buying a property I have called the top of the equity bull-run by buying a properties worth of equities.

    A selfless act, I know, but I thought it was time I took one for the team?

    Give it a few weeks and there will be bargains galore out there 😉

    Joking aside – I read that Ferri article a while back and thought it was pretty sensible on the subject. I’m probably more around 30% rather than 20% with the latest buying spree but I just wanted to get it done and dusted so went lump-sum. I’m hoping that putting more of an income slant on things will help psychologically as/when/if capital values plummet. My other strategy is just not looking for a year or three 😉

  • 54 Marco December 6, 2019, 10:09 pm

    I’m 90 – 95% equities (not including my DB pension), age 41. I have about 900k in vanguard all world. I really don’t fear a 50% crash in the slightest, but I would find it annoying only being able to put my earned income into it so I keep a little bit of fun money to put in if the market crashes 20% or more. And who knows, maybe my premium bonds will pay out?

  • 55 HariSeldon December 7, 2019, 8:21 am

    Interesting reference to the Tesco scheme , Mrs Hari has 25+ years there and the SAYE made serious money in the early days. ( in the early year every scheme made money but in the latter years every scheme failed to break the hurdle and we took cash.

    But be wary of any saving scheme that links your investments with your employment, if Tesco does badly the shares tank and your job is at risk…

    We realised every winning Saye immediately but someone we knew had a six figure sum in Tesco and that worked out badly….

  • 56 The Hare December 7, 2019, 10:51 pm

    The first time I invested was @£400K lump sum in early 2014. It wasn’t a small sum for me. It was an inheritance and money that was going to be lived off.

    As someone said earlier, no point learning to swim if you’re going to stay at the side of the pool.

    I remember calling up HL and asking a lot of tax questions they needed to look up the answers to. You know, like which country is this fund actually based in? I didn’t want any nasty foreign tax surprises on my tax return.

  • 57 Frugalista December 20, 2019, 4:44 pm

    As per @Ermine’s post I too have a PCLS lump sum to invest. Having only just found this great site (thank you) and spent very little time looking after my S&S ISAs over many years (I have a buy and forget approach) I realize that I probably need to give those a good overhaul too. I’m paying too much in fund platform fees for a start.

    This all means I have a frightening (to me) amount of money to invest/rationalize and yet I still don’t want to go the Financial Adviser route and pay someone to do it for me……… I’ll probably drip feed.

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