A question I frequently get asked by clients when they are investing cash into the market is whether the funds should be invested in a lump sum or averaged in over time?

The answer is yes.

Okay, I’m trying to be cute but I’ll explain.

Investment planning is fairly academic and if everyone relied on just using the best information available to make evidence based decisions, they would play the odds and always invest in a lump sum. I base that on my own observations of market behavior which also had something to do with our “Fee Only When You’re Up” pricing models. In my research of how often the market is up, I found that day to day, it is slightly more likely that the market will be up than down.

Over the past 25 years, there were 6294 trading days, of which 3394 were up (54%) and 2900 were down (46%). There were 1304 weeks, with 747 up (57%) and 557 down (43%). Finally, there were 300 months, with 198 up (66%) and 102 down (34%).

The odds of buying at a higher price tomorrow are higher than buying at a lower price, and the longer you take, the higher the odds are that you will buy at a higher price. So if we are just looking at this from a probability perspective, dollar cost averaging over time seems likely to increase your average purchase price.

Of course, you can get lucky and catch the market in a rare but severe downturn like we saw in the Spring of 2020. Even if you had predicted that a cold virus variant would leap from a meat market (or laboratory, depending on your view) in China to shut down the world economy, you had to time your entry pretty carefully. If you had taken too long to average in during the downturn, you would have missed the dip as the S&P 500 ended the year over 18% higher than it started including dividends.

However, investing isn’t always about probabilities. People, for better or worse, have emotions and opinions. Frequently, as an advisor, I find my job is to navigate the gap that can exist between what is known academically and what we think or feel about that.

Take for example a risk averse investor that can’t sleep at night when presented with the prospect of investing a large sum all at once. If the alternative is that they may not invest at all, then averaging in over a period of time may make sense if that that provides some level of comfort. Some folks like to take a plunge into Barton Springs while others will tip toe in.

Recently, with the market seemingly hitting new record highs every week, I’ve found more investors convinced we are due for a selloff. Yesterday marked the 66th high for the S&P 500 since the March 23, 2020 low of 2,237.40. We haven’t seen a pullback of more than 5% so far this year and haven't seen an actual correction (a pullback of 10% or more) since last September. I can’t necessarily disagree that we seem to be due, but I also have a very poor track record of predicting such things. So I advocate using a disciplined approach of committing to average in over a period of time, say 3 months or so. If we get a correction along the way, we can always invest the funds sooner than later. If we don’t, we’ll at least be invested and not sitting on the sidelines indefinitely.

Of course, if you don’t have a lump sum to invest and are regularly saving, you may have no alternative than to dollar cost average. That is essentially what is happening with retirement account contributions that come out of your paycheck. But if you are deciding whether to invest an IRA contribution today or wait, the odds are that waiting will cost you.

Do you have cash on the sidelines but no plan to get it invested? Waiting may payoff, but the odds aren’t in your favor. Get in touch to make a plan.