Lump sum or drip


#1

A question.

If I had a lump sum of money and I intended to invest in a dividend producing product, say iShares FTSE 100 (ISF), but I don’t know if the current price is a good entry point would I be better to buy in one go and then let dividends smooth out any drops over time, or should I drip feed in benefiting from pound cost averaging but taking longer to build up my dividend return because my money stays in cash for longer?

I ask because the FTSE 100 seems quite high at the moment and I am wondering how to take a position.

Thanks


(Gareth) #2

Vanguard’s paper found that lump sum investing beat drip-feeding around two-thirds of the time in the UK and US. But in reality, you need to make the decision that you feel comfortable as it comes down to your risk appetite.


#3

Thanks for the link, I shall take a look at that.


(Louis Otto) #4

Given political uncertainty right now with Brexit and such, I’d avoid putting in a lump sump into the UK market right now. As with anything, diversify across a few markets to play it safe. You can always build/change positions over time.


(Rob N) #5

I’d go for a smaller cost averaging approach to begin with then put in larger lumps sums (plural) in tranches regularly over time or when there are opportunities. It’s hard to know what the markets are going to do and so it’s good to have something in there for when there’s a good run. See another Vangaurd article ‘Time in the market vs timing the market’ from which the below quote is from:

"So if it’s hard, or even impossible, to time the markets, what can you do if you’re concerned about short-term shocks?

If you’re looking to invest using current income, an option is to do so via scheduled monthly contributions. Not only can this build financial discipline, but it can position you for success over the long term. Similarly, if you are investing a lump sum, you might consider splitting it into a number of tranches. For example, if you have £30,000, you could invest £10,000 every other month over a six-month period to reduce your exposure to short-term market risk."


#6

Yeah as everyone else has said, the maths (Vanguard’s paper) might say that two thirds of the time you’ll come out ahead by lump summing, but that doesn’t help if you are in the one third.

Better to minimise regret than try optimise return. For this investor that usually means drip feeding in chunks, which leaves money on the table in a consistent up market, but reduces sadness and brings some opportunity in wobbly or down markets. Drip feed and then sleep well.


#7

Good article & comments on this cost-averaging concept:



(Alex Sherwood) #8

That’s a great post, we were planning to write something similar, to point this out (among other things) -

The answer is unsurprising: drip-feeding has done better only when the market then fell, and since markets rise more often than they fall, lump-sum investing is a better bet.

but I guess they’ve beaten us to it :pensive:

Anyway, I’m a huge fan of this point -

If facile arguments for cost averaging reassure small investors and stop them from selling at the bottom, that is no bad thing.

finding solutions for human behaviour, as opposed to rational behaviour, for the win.


#9

I’m sure we’d all like to hear this again with a Freetrade twist. No harm in hammering the point home :hammer:

Absolutely!


#10

Realistically though, most people will only be able to afford to invest via drip feeding (eg in monthly amounts), unless they’re sitting on large pots of cash (maybe cash ISAs?) ready to invest in lump sums?


(Dave Smith) #11

Exactly, Lump sum might win most of the time, but only if you have a lump sum to start with


#12

Yes, as pointedly out in the article:

The simplest point in favour of drip-feeding is that it reflects the situation of a typical salaried investor. Purists will say that “cost averaging” should only be used to describe a deliberate strategy of delaying investment, but retail advisers often speak of the magic of cost averaging while praising regular investment. The magic may be illusory, but the benefits of regular investment are not.

It’s not a complete denouncement of the concept, but an illuminating article on the subject.