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 dilemma is whether 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 year’s 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 taking 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.