Research shows that two common investing strategies produce different results. Here are the pros and cons that can help you make the right choice.
Congratulations! A lump sum of cash has just fallen into your lap. Now, you must answer an important question: Will you be better off investing it all at once, or over time?
In other words, which investing strategy will maximize your money: immediate investing or systematic investing, also referred to as dollar cost averaging?
According to recent report by the Vanguard Group, immediate investing yields greater returns most of the time. But systematic investing has an advantage that might make it the better option for many investors.
For its research, Vanguard compared the historical performances of both investing strategies across rolling 12-month periods in the financial markets of the U.S., the United Kingdom and Australia.
In all three of those markets, immediate investing led to greater portfolio values about two-thirds of the time. In the U.S., immediate investing outperformed systematic investing by an average of 2.39 percentage points — the most of the three markets examined.
Vanguard also found that immediate investment of a lump sum outperformed systematic investing by greater amounts over longer periods of time. In the U.S., for example, immediate investing outperformed:
- About 64 percent of the time across six-month periods.
- About 92 percent of the time across 36-month periods.
Vanguard’s report describes the findings as “unsurprising,” explaining:
Stocks and bonds have historically produced higher returns than cash, as compensation for their greater risks. By putting a lump sum to work right away, investors have been able to take advantage of these risk premia for a slightly longer period.
While systematic investing usually leads to lower returns than immediate investing, Andy Clarke, a senior investment strategist at Vanguard, notes that the difference in returns has been “modest” on average.
Systematic investing of a lump sum can also be considered a risk-reduction strategy, Vanguard notes. For example, it could reduce the impact that a sudden market drop would have on your portfolio.
Money Talks News founder Stacy Johnson advocates systematic investing for similar reasons. As he explains in “Ask Stacy: Should I Get Started With Stocks?“:
“… when the market tanks and prices are low, your fixed amount will buy more shares. When the market is high, you’ll buy fewer.
Buying fixed amounts at fixed intervals will always make money, no matter what the investment, as long as it fluctuates in value and ends up higher in the long run.”
What’s your take on immediate versus systematic investing of large sums? Sound off below or on Facebook.