Now or Later?


One of the most emotionally-charged investing decisions involves lump sums. When you get a pile of money, what should you do with it? The stakes are high, and mistakes are costly.

To understand the risk and opportunity of investing lump sums, let’s meet Jim.

On January 1, 2009, Jim retired from his job at ABC Manufacturing. He had worked there for 30 years. The company’s pension plan gave him two options: (1) receive a monthly check for life, or (2) take a lump sum payment.

Jim had always wanted to try his hand at investing but never had the money available to do so. He decided his retirement and the lump sum pension payment option was the perfect opportunity.

After a little paperwork, the pension provider deposited $500,000 into an IRA account in Jim’s name.

Jim paid attention to the stock market and took note of recent events around his retirement date. In 2008, the U.S. stock market had dropped 37%. The headlines were terrifying. Sensing the coast was not clear, Jim held off investing his lump sum. He wanted a more stable environment.

Jim was fortunate. Between his monthly Social Security check and rent from his inherited farmland, he had enough to live comfortably. He had no need to draw down his lump sum pension payment. That gave him enormous flexibility, something many people do not have.

After watching the stock market continue to dive in the beginning of 2009, Jim was pleased with his decision to remain in cash. The market dropped an additional 18% in the first two months of 2009. The headlines were dismal. The coast was still not clear.

Then something unexpected happened. The market started going up.

And yet headlines blared, “The Worst is Still to Come” and “Recent Gains Are Unsustainable.” Jim kept is $500,000 in cash, protected from the volatile markets.

But the stock market continued to rise. Jim found himself regretting his decision to stay in cash. He began hoping for a market pullback so he could invest at the prior lows he had witnessed. The pullback never came. The market moved higher.

Finally, on January 1, 2014, Jim was tired of watching the stock market go up. He gave in and invested 60% of his lump sum in U.S. stocks and 40% in U.S. bonds.

It was a good decision.

Fast forward to July 1, 2018, Jim’s $500,000 had grown nicely to $700,000. Jim was pleased. Life was good.

Jim, however, did not consider what might have been. What if he had simply invested all $500,000 on January 1, 2009, when it was deposited into his IRA account? Using the same conservative mix – 60% stocks and 40% bonds – Jim’s portfolio would have been worth a whopping $1,200,000! He missed out on half a million dollars of gains!

Jim’s situation is common, although amplified by the extreme market conditions of the time.

It’s natural to look for an “all clear” sign before investing. Unfortunately, no such sign exists. Delaying investment decisions is a form of market-timing, a technique that has been proven to fail, time and time again.

So what should you do with a lump sum of money? It depends on your needs and goals, but it is important to remember that the stock market goes up over time. Thus, looking solely at the probabilities, the best bet is to invest lump sums immediately.

The downside of this approach, which is what kept Jim from investing his money initially, is the prospect of encountering a market crash shortly after investing. This problem is intensified when near-term withdrawals are needed from the portfolio for living expenses – potentially buying high and selling low.

To help with the psychological fear of losing a chunk of money shortly after investing, an alternative method is available. You could invest your money over time – over the course of six months to a year – through a series of equal amounts until the lump sum is fully invested. This technique helps reduce regret. If the market immediately falls, you haven’t invested everything. If the market immediately rises, you have at least invested something.

Vanguard, a prominent investment company, performed a study on investing lump sums. It found that investing lump sums immediately was the best course of action 64% of the time when analyzed over a six-month timeframe, using historical market performance. However, by widening the timeframe to 36-months, Vanguard calculated that the lump sum method outperformed alternatives 92% of the time. Not always, but almost.

The next time you receive a lump sum amount of money either from a pension, inheritance, lottery, life insurance payout, or selling a business or property, think less about the current market environment and more about making sure the money is invested sooner rather than later.

Time in the market is far more important than timing the market.


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