What’s the best way to invest that lump sum?

If you’re lucky enough to have a bit of surplus cash right now, it’s a difficult time to think about putting it to work.

Many dairy farmers will be fortunate enough to be in that position, with the sale of Mainland Group to Lactalis expected to settle within days.

The $4.2 billion proceeds from the sale will mean a capital return of $2.00 per Fonterra share.

For a typical Fonterra shareholder, the total could be as high as $400,000.

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Those who’ve sold a business, exited a rental property investment or received an inheritance would be facing a similar conundrum.

The easy option is to leave it in the bank, earning a modest return and taking on very little risk.

That could be sensible in the short term, but it’s not a long-term strategy.

Cash and deposits offer no growth and very little inflation protection.

The current deposit rate of 3.5 per cent turns into 2.5 per cent after tax, and with the inflation rate running at 3.1 per cent, the “real” return very quickly turns negative.

To allow for some tax and cost leakage while still beating inflation, you need your hard-earned capital to work more productively than this.

That makes for a very common dilemma.

It’s scary to think about venturing into financial markets (or any asset class, for that matter) with your savings.

When things are going well, you wonder if you’ve missed the boat.

When markets face challenges, it feels safer to wait for the outlook to improve.

One option is to simply close your eyes, grit your teeth and invest your money right now, all at once.

While it sounds outlandish, most evidence proves this is a wise move.

A 2023 study by Vanguard (based on returns from 1976 to 2022) showed that lump sum investing led to better returns 68 per cent of the time.

That’s because sharemarkets are usually rising.

I looked at returns over the past 30 years for shares in New Zealand, Australia and the United States.

During those three decades, annual returns have averaged 8-10 per cent and markets were up in 80 per cent of 12-month periods.

Combine that with some lower risk fixed income and the annual return slips to 7-8 per cent, but the hit rate of positive returns climbs toward 90 per cent.

Put another way, at any given time you’re probably better off just getting on with it, rather than waiting for the stars to align.

Having said that, none of us want to invest at the top of the market or when things are about to head south.

The price you pay has a significant influence on your future returns, so your entry point is crucial.

A few of the outcomes in Vanguard’s other 32 per cent of occasions won’t be pretty.

If you’re unlucky enough to invest your lump sum immediately before a market downturn or recession, it might take years to recover.

That suggests we should sit back and wait for a big fall, then take advantage of cheaper prices.

A great idea in theory, but this requires a fairly accurate crystal ball.

Markets have a habit of proving us wrong.

A rosy outlook can turn on a dime, while the long-heralded slumps we patiently await sometimes never arrive.

There’s also the behavioural aspect of investing to consider.

With hindsight, it’s easy to look back and work out that the best time to invest was in the depths of uncertainty, nervousness and extreme negativity.

However, during those periods we aren’t always brave enough to follow through.

Our inclination can be to wait for evidence things are on the up before making our move.

That can mean we risk missing some of the rebound and once prices have already reacted, we’re back at square one.

As with many things in life (and certainly when it comes to investing), being at extremes is risky.

Diving in boots and all is foolhardy, while waiting in the wings for perfect conditions can be equally unwise.

That’s why most investment advisers will recommend putting your money to work bit by bit.

This approach is sometimes called dollar cost averaging, or instalment investing.

For our conservative Fonterra shareholder, that might mean investing $50,000 every six weeks, which would see the entire $400,000 deployed over the course of a year.

For a young person contributing to KiwiSaver, they’re essentially investing in this manner over their entire working life.

The result will be a middle-of-the-road outcome, but you’ll drastically reduce your chances of getting the timing completely wrong and ending up at the ugly end of the spectrum.

The investment backdrop always feels risky, no matter the conditions, but strategies like this can give you some flexibility while helping swing the odds back in your favour.

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