If you receive a large sum of money from an inheritance or the sale of your house or business, you have every interest in investing in the stock market. In fact, if you keep your small fortune in a bank account, it may lose value each year because of inflation. But how do you go about doing it? A few weeks ago on his LinkedIn account, Jonathan Durocher, President of National Bank Investment, detailed two possible strategies to follow when investing a large sum of money: invest it all at once or stagger your investments over time.
Investing in the stock market all at once
According to a Vanguard study using historical data from three markets (American, Australian and British), it is better to invest your money all at once rather than in stages. In fact, in 70% of cases, an investor who invests everything in one shot gets a higher return than one who spreads out his investment.
His post was showing that the return on a sum invested all at once is 2.39% higher than that for a sum invested in several stages.
It would seem, therefore, that you should invest your money all at once. However, although returns are generally higher with this strategy, it is still more risky. It's the risk premium. Because if prices decline, you can lose a lot of money. Furthermore, this strategy can be a source of financial stress, in practice. It is therefore recommended to those who are able to withstand market pressure.
Investing in the stock market in multiple steps over time
There are techniques to limit your stress and your risks. If you don’t feel comfortable with a one-time investment, spread out your investments. However, Vanguard recommends doing so under certain conditions. First, spread your investments over a short period. In fact, the more you spread out your investment over time, the lower your earnings will be.
In addition, be rigorous with your investments. Let's look at an example: You receive $120,000 and you decide to invest it in 10 stages over one year, for example into your RRSP account. Your portfolio structure is 60% equities and 40% bonds. So every month you invest 60% of $10,000 into equities and the remaining 40% into bonds. That's $6000 in shares and $4000 in bonds. This method allows you to maintain your portfolio structure regardless of the amount invested. The mistake to avoid would be to invest $10,000 in bonds one month, and $10,000 in shares the following month, because doing it this way doesn’t respect your portfolio’s structure.
This strategy also requires you to be disciplined. In fact, market volatility could influence you and make you change your strategy during the year. So don’t let yourself be swayed by this, and stay on course.
Lastly, spreading your investments will cost you more in tradin fees than if you invest it all at once. Therefore, investing it all at once may be more risky, but you will get a risk premium resulting in a potentially higher return. Ultimately, it all depends on your investor profile and your ability to handle financial stress.