Lump sum or savings plan: which works better?

When a large amount of money becomes available — an inheritance, a bonus, the sale of a property — there are two ways to invest it: all at once, as a lump sum, or in equal parts over a period of months, as a savings plan. The question only arises for money that already exists; savings from a monthly income are invested regularly simply because that is how they arrive.

What the evidence says

Studies of historical stock and bond markets have found that investing a lump sum immediately beat spreading it over the following year about two times out of three. The reason is simple: markets have risen more often than they have fallen, so money kept waiting in cash has usually missed part of the rise.

The expected cost of spreading can be approximated. If the market is expected to return $\mu a$ month and cash earns $r_c$ , money invested in $n$ equal monthly instalments is on average only half invested during that time, so the expected return given up is roughly:

\text{Expected cost} \approx \frac{n}{2} \times (\mu - r_c)

A simple illustration

€60,000 is to be invested. Stocks are expected to return about 0.6% a month, and cash earns 0.2% a month. Spreading the investment over 12 months costs, on average:

\text{Expected cost} \approx \frac{12}{2} \times (0.6\% - 0.2\%) = 2.4\%

— about €1,440 of expected return. That is the average outcome. In a year in which the market falls 20% soon after the start, the savings plan would have avoided much of the loss, which is exactly the case investors fear most.

How the risks differ

	Lump sum	Savings plan
Expected return	higher	lower, as money waits in cash
Risk of a bad start	full exposure from the first day	spread over the period
Regret	high if the market falls right away	high if the market rises while waiting
Discipline needed	one decision	continuing through a falling market

How to decide

If a sharp early loss would lead to selling in panic, a savings plan over 6 to 12 months can be worth its expected cost: the best strategy is the one that is carried through.
If the money is invested for the long term and a fall can be tolerated, the evidence favours investing at once.
A middle way is to invest part immediately and the rest over a few months.
Keep the period short. Spreading over several years keeps much of the money out of the market for a long time and multiplies the expected cost.

Whichever is chosen, deciding the plan in advance — rather than waiting for a "better moment" — matters more than the choice itself.

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