Skip to content
GetProfitable
Search
Dictionary

Lump sum investing

Deploying an entire available amount at once rather than spreading it over time; historically the higher-expected-return choice, at the cost of worse timing risk.

If a market has a positive expected return, time in it is valuable, so holding cash while averaging in gives up expected return. Studies across long histories generally find lump sum beats a twelve-month averaging plan in roughly two-thirds of periods, by a percentage point or two on average.

The other third matters. Investing $200,000 the month before a 35% decline leaves $130,000 and a real chance the investor abandons the plan. dollar-cost-averaging over twelve months would have cut that loss and kept them invested.

A sensible middle ground is to lump-sum into the defensive part of the target allocation immediately and average into the volatile part over a set window, with the window fixed in advance so it cannot be extended out of fear.

Related: dollar-cost-averaging, value-averaging, asset-allocation, sequence-of-returns-risk, loss-aversion

Educational only, not advice. Spotted an error? Post in Site Feedback.