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Should I stagger my investments or invest a lump sum of money?

Many investors know the concept and benefits of dollar-cost averaging or investing a regular amount. It’s commonly understood that the best results come from regular savings that reduce the average cost of purchase.

But what about when you are changing your investment strategy or wanting to invest a cash lump sum? Are the rules different? Should you dive in or go step-by-step?

Three things to consider

As with most things, it depends on first, you and your circumstances; second, the cost; and third and most of all, your head. Or your emotions to be specific.

1. Is the amount meaningful?

To some people, $10,000 to a diversified fund is a flutter and to others it’s hard earned scrimping and saving. It’s all relative to you, how experienced with investing you are and often the source of the money.

Money from a great lotto ticket or recent investment gains is somehow different than money from inheritances or regular accumulation. This is what’s called “mental accounting” coined by Noble Prize winner Richard Thaler, who wrote this great book. Think of the mental part in an Urban Dictionary sense rather than cognitive, because it aint rational. So whilst there there’s no hard or fast rule to whether an amount is meaningful, it is your first point to consider.

2. Cost and effort

Your second consideration is slightly more mundane – but nevertheless important. There are often minimum investment amounts or transaction fees that prevent drip-feeding. With Kernel that’s irrelevant as there are no transaction fees whether you invest weekly, monthly or all at once.

Once you’ve found a cost effective solution, you do need to consider the effort involved. You want to avoid manual action on your part if possible, because things always It’s life – you’re busy, things pop up.

Finding an auto-invest really is a must if you want to drip feed your investment.

3. Your monkey brain

The last, and most important consideration, is the level of emotional protection you need. Our general advice is by all means invest your lump sum at once, because time in the market is ultimately your greatest friend. BUT, if you do this, you have to promise us that in two weeks, four weeks or 12 weeks from now, you won’t freak out if the market goes down and change your investments.

Over the long term you’re very, very unlikely to lose all your money invested in a diversified fund. However, it will bounce around and this can happen the day after you invest. No one likes to see their $10,000 suddenly become $9,865. All those endorphins you had after investing your money towards your goals suddenly becomes a kick in the guts.

This is because of two pretty powerful psychological concepts: loss aversion and dissonance.

Loss aversion, or officially “prospect theory”, is that losing money hurts so much more than gaining money. Call it reptilian, competitive or self-protecting; it’s been proven over and over again that we hate losing about twice as much as winning. My 4 year old’s tantrums are testament to that!

And money is so emotional – it’s our belief in the future and our prosperity. Which brings us to dissonance, also known as buyer’s remorse. This is the disharmony, discomfort, tension, shame and anxiety that comes after a purchase. It applies to that amazing patterned but expensive shirt that caught your eye, as much as to the investment that you chose.

If only you’d waited a month – the shirt was on sale or you’d have avoided the market dropping 15%. Hindsight is so wonderful. Yet not even the experts can predict the future or avoid it.

An emotional hard hat

This is where staggering your investment over some weeks or months gives you emotional protection. When investing for the long term you’ve got to remember it’s long term. You can’t change your mind if it goes wrong to start with or chase the recent good returns of other investments. Only true changes in your personal circumstances should result in a change to your portfolio. Promise?

Lump sum & cash flow investing

If you’re in the great position to be investing a lump sum and a regular amount from cash flow – good news – you can do both simultaneously.

Say you have $20,000 plus $1,000 a month to invest, yet you want to spread your $20k over 3 months. Investing over 13 weeks means you start your weekly investments of $1,769 and then once your lump sum is fully invested, you reduce your regular amount to $1,000. Too easy.

A few last thoughts

So what about now, in a COVID-19 affected world, where volatility, commentary and naïve investing speculation are abundant?

The same principles apply, but what we can add is this – the impact is still unknown. Some New Zealand companies are being unfairly penalised until they can really calculate and release new earnings guidance. Until then, everyone is guessing, including the company.

How long before Air New Zealand flies again internationally? How long before landlords know who the next Burger King is? How long before the retirement villages can finish their construction projects? As at May 2020, we would guess 3-6 months before all the knock-on impacts are known and the winners and losers stabilise.

Remember – uncertainty deflates share prices. So, unless you have an iron stomach and no sell impulse, we would suggest splitting your lump sum investments weekly or monthly over a couple of months.

If you are super strong willed and focused on the long term, that whatever happens the next few months, you won’t be phased – just get stuck in. In the long run, it will be worth much more. But you must promise…

Learn more about the easiest way to dollar cost average with Auto Invest.

Stephen Upton

Stephen Upton

Chief Operating Officer



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Indices provided by: S&P Dow Jones Indices