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When you are ready to invest, one of the most important questions is: do you invest the amount in one lump sum, or is it better to invest periodically? At Vive, we help you make the right choice, depending on your goals and risk profile. In this blog, we explain the pros and cons of both options, so you can make the decision that best suits you.
We like to keep things simple at Vive, but we understand this choice can be difficult. Investing a large amount in one lump sum can be favourable if you happen to enter the market at a low point – you buy in cheaply. However, it also carries the risk that you might enter just at a peak. Gradual investment, also known as dollar-cost averaging, offers a way to reduce this timing risk by spreading your investment over a longer period.
With gradual investment, you therefore do not have to time the market – you automatically include both the lower and higher prices, resulting in a better average.
Investing everything in one go means that from day one you are fully exposed to the whims of the market. This can lead to large profits if the market rises immediately after you enter, but also to substantial losses if the market falls. The biggest risk is that you invest just as the market is at its peak, followed by a decline.
In short, lump-sum investing increases the impact of timing: timing well can yield a lot, but timing badly can be painful. You can reduce this risk by spreading your investments.
Gradual investment reduces the impact of market fluctuations because you enter at different times. For example, you invest a portion of your money every month or quarter. This can help prevent major losses, as your entire capital is not in the market at an unfavourable time.
The potential disadvantage is that if the market were to go straight up, you would miss out on some return with gradual investing compared to investing the full amount immediately. Nevertheless, periodic investing usually offers a more stable approach with less risk, especially for investors who find peaks and troughs difficult. You spread the risk over time.
Do you have a long-term horizon in mind (for example, 10 years or longer)? Historically, early and lump-sum investing often yields a higher final amount because you maximise the benefits of compound growth (the interest-on-interest effect or growth-on-growth in investments). Every day your money is in the market, it can generate returns. From that point of view, lump-sum investing can be advantageous if you have a large amount immediately available.
On the other hand, if you have a long-term horizon but feel uncertain due to short-term volatility, gradual investment can still give you more peace of mind – even if you theoretically have slightly lower returns, you will probably sleep better with a gradual entry.
Besides the choice between lump sum or gradual investment, there is also the question of what to invest in. Often, a mix of shares and bonds is sensible, tailored to your risk appetite. Shares usually offer higher returns in the long term but fluctuate up and down. Bonds are more stable and generally provide fixed interest or smaller fluctuations. A balanced mix can ensure you benefit from both: growth through shares, and stability through bonds.
Vive usually recommends a personal mix based on your investment profile (internal link to profile selection). If you are young and can invest for a long time, you may be able to hold more shares (more offensive). If you are closer to your goal or retirement, you may want a few more bonds (more defensive) to protect your profits. The nice thing about periodic investing is that you can also adjust your ratio with every deposit if necessary.
There is no unequivocal answer to the question of whether it is better to invest in one lump sum or gradually. It depends on your personal risk appetite, the amount of money you have available, and your financial goals. Lump-sum investing can yield more if the timing is right, but it is riskier. Gradual investment provides more peace of mind and consistency but may take a little more time for the same result.