In this post, you’ll learn what Lump Sum is and why you should know about it.
So, What is Lump Sum?
Going straight to the point, lump sum is the act of investing a large part of your money at once, rather than reinvesting it throughout a longer period of time.
Why Should You Consider This Strategy?
Even though it is proven to be better, it might not be the best for you. We have to take into consideration factors such as:
- Are you able to control your emotions during a bear-market?
- Will you need that money in a forseeable future?
- Given your age, are you comfortable entering into a long term investment?
We’ll address each of the questions above and discuss them properly.
Are You Able to Control Your Emotions During a Bear-Market?
Picture this scenario in your head:
You just invested $ 50 000 in multiple ETFs and you are confident about the market in the following months/years.
A few weeks later… a crash like in 2008 happens and you see 90% of your portfolio getting down. How would you react?
We can discuss that the timing was unfortunate, but this is a possible outcome of this approach.
Would you have the patience to wait 5/10/15/20 years until the market recovered and your investments turned positive again? If the answer is yes, you are 1/3 ready to use the lump sum investment strategy!
Will You Need That Money in a Forseeable Future?
This may be an obvious point, but it should be well planned beforehand.
You certainly don’t want to end up paying taxes because you’ve miscalculated the amount of money you could afford to invest, right?
As the cliché goes, “do not afford to lose more than you can!” (or something among those lines).
So now that you are 2/3 ready, let’s go to the final question.
Given Your Age, Are You Comfortable Entering Into a Long Term Investment?
I don’t think there should be an age restriction when talking about investments unless…
Unless you don’t feel comfortable leaving your inheritance to someone else (friend, family).
Remembering point number one, that things can go south really fast when you are less expecting it to happen, you must be ready for any scenario.
So if you are, let’s say, 50 years old and decide to invest in the market only now with some of your saved funds, you must know that if things don’t go well, there might be decades until you see a green light in the horizon again.
I personally prefer the dollar-cost averaging strategy because it gives me more maneuver to invest during crashes.
In other words, despite reinvesting monthly, I’ll always keep an extra amount to bear-market periods when I can buy stocks at “discount” prices.
Also, I don’t know how would I handle my emotions if after investing a big amount, all my assets dropped immensely… Even though I think I could handle them, I prefer to play a little bit less risky game and still see some results.