Investing A Lump Sum Pays Off

Vanguard Group, a mutual fund giant, challenges slow and steady dollar-cost averaging and suggests that there is a more effective technique when it comes to investing in stocks. They suggest that investing a lump sum of money in stocks all at once leads to be more profitable then someone who slowly invests their money over the same time span.

If you were to walk into a broker’s office with a large amount of money, chances are you’ll be told that there’s no reason to invest it all at once. They’ll suggest that you should invest that money over a period of time so there’s less to worry about if your stocks take a dive the same day you invest. Vanguard Group is trying to prove that approach wrong. The Malvern, Pa.-based company, whose investment research is closely followed by financial advisers, recently published a paper showing that dollar-cost averaging ends up hurting more investors than it helps. Proving that dollar-cost averaging hurts more investors than it helps is one thing, but to convince savvy investors to adopt a new technique when investing their clients money, is another. Dollar-cost averaging does have its benefits. It’s a strategy that can calm the client’s nerves and discourage irrational moves.

Vanguard’s study examines what happens when investors have the luxury of an inheritance or some other large amount of cash. The company chose the figures $1 million and $20 million (since institutions and foundations both face the same conundrum as individuals) and ran hundreds of computer simulations to test what would happen if investors trickled their money into the stock market from periods ranging from six months to three years versus investing it all at once. The computer simulations were based on market returns for rolling 10-year periods starting in February 1926 and ending in December 2011. In addition to the U.S., the researchers looked at the same periods for the U.K. and Australia.

The results came back suggesting that those who took a year to fully invest lagged investors who went all-in about 2/3 of the time. People who took more time to invest faced even worse odds. Surprisingly, it didn’t make a difference if investors picked an aggressive portfolio made up of entirely stocks, a mix of stocks and bonds, or a conservative portfolio made up of entirely of bonds. In dollar terms the discrepancies could be significant: a $1 million portfolio invested all at once in a mix of 60% stocks and 40% bonds turned into $2,450,264 on average, compared to $2,395,824 when the same U.S. securities were bought over the course of a year, a difference of more than $54,000.