What Do I do With My Lump Sum? Pound Cost Averaging or All at Once


Having just sold a Buy to Let investment property I´m in the lucky position of having a lump sum to invest in the stock market.  I know exactly where I´m going to invest but my dilema is wheter to invest it as a lump sum or drip feed it - say over 2 to 3 years. (Pound Cost Averaging). 

Researching the web the overwhelming recommendation is that a lump sum investment will generate higher long term returns.  A much quoted publication is from Vanguard ¨Dollar Cost Averaging Just Means Taking The Risk Later¨.  The study looks at the US, Australian and UK markets making a hypothetical investment either as a lump sum or drip fed over periods up to 3 years.  For the UK the period examined was 1976-2011taking 10 year investment periods and comparing the end result of investing in a 60/40 equity/bond mix.  In 66% of the years lump sum investment paid off - or taking a pessimist´s viewpoint 1/3 of the time you would have been better off drip feeding.

Vanguard´s conclusion was that you are much better off investing the lump sum - except if you fear a market downturn or are likely to suffer severe regret if subject to such a downturn.   I´m not sure that the conclusion is particularly helpful as the only reason for not investing a lump sum is the concern of market mistiming... and concern is what I have. 

In the UK we are in for a rocky year or two due to Brexit uncertainty.  Globally trade uncertainty weighs on the markets.  In both cases there could be strong market upturns.  A resolution to Brexit should result in a stronger pound and a recovery in UK oriented stocks.  A US trade agreement with China (which is highly likely before the US elections next year in order to boost Trump´s reelection chances) will drive markets higher.  Or ... we have a hard Brexit and Trump sticks to his guns over China and EU trade, a UK election with Corbyn winning.. or have the markets fully discounted the worst-come outcomes.

Supposedly financial markets are perfect markets with take account of the probability of all possible events so the price of any stock or bond reflects these probabilities.  I´m not so sure so for me the 1 in 3 chance of failure far outweighs the opportunity to make a bit more money.  So safety first - I´ll drip my money into the market over the next 2 years.




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