Immediate vs. Systematic Investing

Being in the investment management (and financial planning) business, we often get new clients who contact us because they have come into large sums of money, whether from a sale of a business, inheritance, or lump-sum pension distributions, and then ask us what to do with it.

The (usual) answer? Invest it.

The financial planning side of our services helps us plan and determine what the long-term investment allocation should be for this cash according to each clients’ unique situation and goals – not to mention their risk-tolerance (fear of market returns going up and down).  Then the investment management side of the business allows us to deploy the pre-determined strategies, all in-house.  

The number one question/concern we hear from clients, especially when this new pile of cash represents the majority of their investable assets, is this: What if I invest everything in the market all at once, and then the bottom falls out and I lose a huge chunk? Can we invest over a period of time instead?

Vanguard recently published a white paper study on the costs and benefits of investing a chunk of change immediately, meaning all at once, versus employing a systematic investment plan that puts portions of cash into the market periodically over time (anywhere from six months to 3 years).

To test the difference, Vanguard studied the returns of investing cash immediately vs. over a 12-month period into an ultimate allocation of 60% Stocks and 40% Bonds in three different markets (United States, United Kingdom, and Australia).

In all three countries, immediate investment out-performed systematic investment at least 66% of the time, by a margin of about 2%.  Even a portfolio immediately invested in 100% Bonds out-performed systematic investment 66% of the time – demonstrating that asset allocation has no effect on which strategy is safer.

But what if averages and statistics don’t keep you warm at night? Vanguard’s study also showed that, if fear is keeping an investor from putting cash in the market, then a systematic investment strategy is in fact the better option – especially if the worst case scenarios prove true in their situation.  The key? Make sure your investment process is systematic – make the plan, execute the plan.  Don’t make each instance you invest another portion a separate decision based on how you feel about the market that day.

Though historical data and studies ultimately conclude immediate investment yields better long-term results, and systematic investment is really just to make the client feel better, it’s still an important discussion to have.  Be sure to find an advisor who will educate and make the decision with you, not for you!