IS NOW THE RIGHT TIME TO INVEST THAT LUMP SUM?
Mark Lister, 11 May 2018
You’ve sold the business or the farm, maybe got out of the rental property game, or simply downsized and moved into a smaller place somewhere with better weather.
One way or another, you’ve ended up with a tidy sum of surplus cash. Having spent a good few decades working to amass this nest egg, you want your money to work equally hard from here on.
For those fortunate enough to be in this position, it’s a risky time to be thinking about venturing into financial markets (or any asset class, for that matter) with your life savings.
You’ve got two obvious options for how to deploy that hard earned capital. You could close your eyes, grit your teeth and invest the lot today. Alternatively, you could sit back and wait for the inevitable downturn, then take full advantage of cheap prices and get in at a much better entry point.
Statistically speaking, the best time to invest is usually right now. Most of the time, shares and fixed interest provide positive returns and over the long-term, shares go up about four out of every five years. Put another way, at any given time there’s roughly an 80 per cent chance you’re better off getting amongst it immediately, rather of waiting.
However, I wouldn’t recommend that right now. Markets have had a stellar run and we’re only a few months away from this bull market being the longest in the post-war period. The last thing you want to do is dive in at the top, like I did when I bought my first house in mid-2007. I sold that in 2014 and still didn’t get my money back.
Maybe a better idea is to wait for the next correction or bear market, then buy at the bottom and reap the rewards of the sharp recovery that, sooner or later, follows every collapse.
An excellent plan, although one that unfortunately requires a fairly accurate crystal ball, which most of us don’t have. Markets could prove you wrong and keep doing well for a while yet, while you sit on the sidelines earning a miserable return on your cash.
There’s also a good chance that in the depths of the decline, everything will look scary and you won’t be brave enough to follow through. You’ll probably wait until there’s clear evidence things are on the up before you make your move. By then you’ll have missed much of the rebound, things will be expensive again and you’ll be back to square one.
For most people, neither of these options are particularly wise. A far more sensible strategy is to put your money to work bit by bit. Split your lump sum into pieces and stagger your way into the market over time. Invest a similar amount each month or each quarter, and spread the total investment over a longer period.
The result will be a middle of the road outcome, but you’ll drastically reduce your chances of getting the timing completely wrong and winding up at the ugly end of the spectrum.
This approach is sometimes called dollar cost averaging or instalment investing, and it strikes a balance between taking control of your finances right away, but in a much lower risk way.
It’s also much more likely to pass the sleep test.