qandaQ: Is it better to invest a lump sum at once or spread it out over time?

Q: I have been gifted a largish sum of money and I am trying to determine whether to put it all in the market per my target asset allocation or spread it out by investing over 6-12 months. Your thoughts? 

A: The industry has always taken the position that money should be invested ASAP. A must-read study from Vanguard may help you make your decision. In fact, I suggest you read it before you read my thoughts. 

The Vanguard study supports the case for immediate investment. When I was an advisor, I often counseled people in your position and found they were more comfortable making lump sum investments when markets were rising and reticent to commit 100% when markets were in decline. Of course the amount of money they had to invest, in relationship to what they already had invested, was an important consideration. Also, money that had been gifted from a loved one was often treated more conservatively than money that came from a bonus or some other less-emotional source.

 You may decide to use the 12-month DCA and at the end of the 12 months the market collapses. You may decide to put it all in now, as the Vanguard study supports, and immediately lose 30% of your money. (Of course you would have lost part of that even if you used the 12-month DCA.) I can’t give specific advice, as I am no longer an advisor, but a compromise may be to put half in now and DCA the balance over 12 to 24 months. If, during the 12 to 24 months the market goes down 20% or 30%, go ahead and invest the rest. 

I am always looking for mechanical answers to overcome the emotional challenges of investing. I should have invested much more aggressively over my life. I would have much more today if I hadn’t invested so aggressively in my 20s and so conservatively for the last 40. But after the early lessons from being too aggressive, I was more comfortable taking a more conservative approach. Your previous experience will probably dictate the answer to your present question. Your answer will not be perfect regardless what you do.  I promise there will be something you could have done better.   We always know what we should have done to do better.  My goal for investors is to find comfortable, trustworthy ways to meet their long term goals.  Let’s say you use the 12 month DCA and you discover you would have better off using lump sum, are you still likely to reach your financial goals?