Lump sum investment timing

blueton · 9 January 2014 at 12:56PM

I have a lump sum to invest in equities. My question is not about where to put it, pension, ISA both sorted, this will be invested outside any tax wrapper.

The full amount can be invested as I have an income.

My pension and ISA investments are more cautious, so my risk tolerance for this investment is quite high and my allocation will probably be UK All Share 30%, UK Small Cap 25%, Developed World ex-UK 25%, Japan 10%, Developing World 10%, all low cost index trackers.

My question is about timing. Assuming an investment horizon of at least 5+ years, would you invest 100% at once, or drip feed, and if so, over what time frame - 3,6,12 months, 1,2,5 years?

I think that the true cost of living inflation is above the official rate and is probably nearer 4% p.a., and so I don't really want to remain mostly in depreciating cash for long periods by drip feeding, but am not sure how much to hold back in cash to buy in at invevitable dips.

Any thoughts on timing and a drip feed strategy?

Glen_Clark · 9 January 2014 at 1:08PM

I think it depends on your psychology. If you go in 100% now you will be taking the same risk as someone who is already in 100%, but has benefited from a 40% increase. But if you both lose 40%, it will probably be easier for him to stomach the loss than you. Even though you have both lost the same amount.
Remember that being happy is more important than making money. Making money is just a means to an end.

Linton · 9 January 2014 at 1:19PM

Invest all at once. No-one knows whether prices will be higher or lower at some particular date in the future, but as you believe (as do I) that prices will generally increase over time you on average do better the longer the period you are invested.

gterr · 9 January 2014 at 1:20PM

Agree with Glen it is a psychology thing.

I invested a lump sum in early November and almost immediately it lost over 1% and has not recovered this yet. We all know that a 1% loss is just noise and lacks significance in the scheme of things, and I keep reminding myself of this, but I can tell you that being £2000 down so quickly makes you feel uncomfortable AND makes you inclined to watch the stock market data too intently, looking for the 1+% rise that will bring you back to square one!

The old adage is that what matters is "time in the market" not "timing the market" and this remains true.

EdGasket · 9 January 2014 at 1:22PM

I would invest some every month or two months over the year. You will then benefit from 'pound cost averageing' (google that for an explanation). There could well be another crisis around the corner giving you the opportunity to buy in at lower prices.

JohnRo · 9 January 2014 at 1:28PM

It all depends whether you think real economies will ever catch up to the Narnia style asset price bubbles being caused by bankers counterfeiting their own billions to speculate with.

dunstonh · 9 January 2014 at 1:32PM

My question is about timing. Assuming an investment horizon of at least 5+ years, would you invest 100% at once, or drip feed, and if so, over what time frame - 3,6,12 months, 1,2,5 years?

If you are investing for just 5+ years then anything you hold back is not going to be invested for the whole period. indeed, if you hold it back upto 5 years then you will barely have any time invested.

Any thoughts on timing and a drip feed strategy?

Crystal ball required. All you can say is that historically, paying in a single premium has proven better on more occasions than phasing (there are more growth periods than negative). However, there is no way to know in advance which will be best.

In the long term (which you dont appear to be looking at), timing makes only a tiny difference.

zabi89 · 9 January 2014 at 1:33PM

Just go all in 100%. I would say that though, it's not my money lol!

Glen_Clark · 9 January 2014 at 1:34PM

gterr wrote: »

makes you inclined to watch the stock market data too intently, looking for the 1+% rise that will bring you back to square one!.

and then I don't know what feels worse - watching it fall another 1%, or selling and watching it rise 1%. For some it would be the latter - even though the subsequent rise would make no financial difference to them!!!

As an indication of how powerful this psychology is, I am reminded of the poor guy who regularly did the lottery. His numbers came up and he was very elated. Then he discovered he had not done the ticket correctly, so he was back to square one. He had lost nothing, was in exactly the same position as he was the day before when he was happy. But he was so depressed he killed himself

Jegersmart · 9 January 2014 at 3:37PM

As someone who does try to time the market, I would suggest a different point of view. The current stock market bull market is beginning to mature and levels are at or near all-time highs.

You could keep it simple and do the following:

Split your pot into 3. Enter with one third when the markets you are looking at have dropped back by 10%, next tranche when they have dropped by 20%, and the last at 30% (from current levels). Time in the market is important for sure, but I doubt that if you wait a few months where you potentially miss out on some corrections along the way that you would lose more than if you entered now at all-time highs.

Of course, if the market climbs another 20% in the next few months then you would miss out on that gain.

I guess it boils down to whether you think it is more likely that the markets will run another 20% on top of the 160% in 5 years that they have already done, or whether a healthy correction will provide a better tactical opportunity.....it also depends on what you invest in, if they are trackers then timing is more important than actively managed (in theory).

Good luck either way.

J

blueton · 9 January 2014 at 3:50PM

Linton wrote: »

Invest all at once. No-one knows whether prices will be higher or lower at some particular date in the future, but as you believe (as do I) that prices will generally increase over time you on average do better the longer the period you are invested.

EdGasket wrote: »

I would invest some every month or two months over the year. You will then benefit from 'pound cost averageing' (google that for an explanation). There could well be another crisis around the corner giving you the opportunity to buy in at lower prices.

gterr wrote: »

what matters is "time in the market" not "timing the market"

dunstonh wrote: »

All you can say is that historically, paying in a single premium has proven better on more occasions than phasing (there are more growth periods than negative). However, there is no way to know in advance which will be best. In the long term (which you dont appear to be looking at), timing makes only a tiny difference.

Thanks for the replies. Most seem to favour a single payment. The dilemma with not keeping some cash back would be seeing the markets drop and not having a good amount of cash to take advantage.

Lump sum investment timing

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