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If you have a lot of cash to invest, you may be wondering if everything should work right away or diversify over time.
regardless of What the market is doingBy making a lump sum investment rather than deploying money at set intervals, you are more likely to have a better balance in the future (known as the dollar cost averaging method). Research From the Northwestern Mutual Wealth Management Show.
Its outperformance applies regardless of the combination of stocks or bonds you invest in.
“If you look at the probability that the cumulative value will be high, you can see that it is overwhelmingly large when using a lump sum investment. [approach] The dollar cost averaging method. ” Matt Stacky, senior portfolio manager at Equity in Northwestern Mutual Wealth Management, said.
The study looked at the 10-year rolling return of $ 1 million starting in 1950 and compared the results of the immediate lump sum investment with the dollar cost averaging method (in this study, $ 1 million invested evenly over 12 months). And then for the remaining 9 years).
Assuming a 100% equity portfolio, the rate of return on a lump sum investment exceeded the dollar cost in an average of 75% of the time. For a portfolio of 60% equity and 40% fixed income, the outperformance rate was 80%. In addition, the 100% fixed income portfolio outperformed the dollar cost in an average of 90% of the time.
The average outperformance of a one-time investment in the entire equity portfolio was 15.23%. It was 10.68% for 60-40 allocations and 4.3% for 100% bonds.
Even when the market is hitting new highs, the data suggests that better results in the future mean working your money all at once, Stucky said. Also, choosing the dollar cost averaging method instead of investing a lump sum will be similar to market timing, regardless of market performance.
“There are many other times in history when we felt the market was soaring,” said Stucky. “But market timing, whether individual or professional, is a very challenging strategy for successful implementation.”
However, the dollar cost averaging method is not a bad strategy, he said. Generally speaking, 401 (k) plan account holders do this through salary contributions throughout the year.
In addition, it’s a good idea to familiarize yourself with risk tolerance, for example, before putting all your money into a stock at once. It’s basically a combination of how well you sleep at night when the market is volatile and how long it takes to get the money. The construction of a portfolio, the combination of equities and fixed income, must reflect its risk tolerance, regardless of when the money is spent.
“From our point of view, we are looking at a 10-year period in our research … and market volatility during that period will be constant, especially for 100% equity portfolios,” Stucky said. .. “It’s better to look forward to the strategy than to later realize that the risk tolerance is very different,” he said.
Comparison of investing a lump sum and diversifying it over time
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