Whether you’ve just received a generous bonus, inherited money, or sold a business, deciding how to invest a lump sum can be tricky. Should you invest everything right away, even if the market feels unpredictable? Or should you ease in gradually?

It’s a common concern many people face, and it’s easy to see why. The fear of making the wrong choice can be overwhelming—what if the market drops right after you invest? Or, what if you wait too long and miss out on gains? It’s perfectly natural to feel uncertain.

Start by Clarifying Your Goals

Before making any investment decisions, consider what you want to achieve with this money.

The stock market is unpredictable in the short term. If your lump sum is earmarked for short-term needs—like covering college tuition in the next few years—you might want to consider more stable options like short-term bonds, bond funds, or certificates of deposit (CDs), which tend to be less impacted by market volatility.

Investing in the stock market is worth considering for longer-term goals, especially if you wish to maintain your purchasing power or use this money to fund long-term goals like retirement. Historically, while the market experiences fluctuations, it tends to rise over the long term.

Lump-Sum Investing vs. Dollar-Cost Averaging

Investing a lump sum means immediately putting your money to work. This approach allows you to benefit from any immediate gains or losses!

You might face a temporary loss if there’s a downturn soon after your investment. If that idea makes you uncomfortable, dollar-cost averaging—investing smaller amounts at regular intervals—might be a better fit for you.

This strategy helps you spread out your risk and take advantage of market fluctuations, ultimately helping you manage the average cost of your investments.

However, while dollar-cost averaging can provide peace of mind, it may come at the expense of potential returns. Studies show that lump-sum investing tends to outperform dollar-cost, averaging about 68% of the time.

So, what’s more, important to you—maximizing long-term returns, potential returns, or reducing short-term risk? If you aim to maximize your investment, lump-sum investing might be the way to go. But if avoiding short-term losses is your priority, dollar-cost averaging could offer a smoother ride. The research indicates that lump-sum investing typically outperforms, but the difference isn’t huge. It could be worth it if a gradual approach helps you sleep better and reduces the chances of panic selling during market drops.

Don’t Let Indecision Hold You Back

Over the long term, both stocks and bonds generally outperform cash. That’s why it’s essential to start investing as soon as possible to harness the power of long-term growth.

Waiting to invest, hoping to time the market perfectly, is a risky game—one that most people lose. Consider that average equity fund investor returns trailed the market (as proxied by the S&P 500) by 5.5% in 2023, primarily due to trying to time to the market.

Both lump-sum investing and dollar-cost averaging help you avoid this behavior and take advantage of the tendency for the market to grow over the long term. And this is what you need to meet your long-term financial goals. Choosing the strategy that will allow you to stick to your long-term plan is important.

 

Need help deciding the best way to invest your windfall? We’re here to help you explore your options and find the approach that suits your financial goals best. CLICK HERE to make an appointment.