You'll hate this advice if you're a cash-heavy investor who is nervous about a stock market correction.
Research on whether it's better to put a lump-sum into the market in one go or ease in with a series of purchases concludes thusly: Dive in; do not ease in bit by bit. Here's why you should ignore this finding if you're committed to investing in stocks, but nervous about the risk of a correction. Sometimes, the investing strategy that suits you best emotionally is not the one with the potential to make you the most money.
The research on lump sum versus gradual investing (also known as dollar-cost averaging), comes from Vanguard, a U.S. mutual fund and exchange-trade fund giant with a rep as a straight talker because it's a client-owned firm and not driven by profit-hungry shareholders. Vanguard looked at markets in the United States, the United Kingdom and Australia, and it concluded that putting a lump sum into the market works better than a gradual approach two-thirds of the time. Get the stock market exposure now; don't wait.
In a recent column, I suggested that nervous investors take their cash – not their entire portfolios, just the cash they've accumulated – and put it to work in a one-year term deposit earning something in the 2 per cent range. That's roughly double what cash is paying these days. What to do a year from now? If the stock market is down a whole bunch, the lump-sum approach makes total sense. But if we're still waiting for a stock market correction, then dollar-cost averaging is the way to go. Divide your cash into four chunks and invest quarterly. Or try three chunks and invest thirdly. You get the idea.
Dollar-cost averaging also makes sense in today's market, even if some of your money could be exposed to a plunging stock market. The upside is that you'll be putting more money in after the decline and thus buying low.
These suggestions are not offered with the goal of making you the most possible money. Rather, they're a plan for taking action with cash that's basically rotting in your investment accounts right now. If dollar-cost averaging gets that money into the market in a way you can live with, then it beats lump-sum investing.