Lump Sum Investments
Receiving a lump sum, whether from a work bonus, inheritance, or tax-free pension sum, presents an excellent opportunity to boost your financial health. But how should you make the most of it?
For any investment decision, we highly recommend seeking professional financial advice.
BANK SAVINGS ACCOUNT
Traditional demand-deposit savings accounts offer liquidity and ease of access but typically come with low-interest rates and potential fees. These accounts allow you to withdraw any or all funds without penalty or prior notice. They are best suited for emergency funds or money you need easy access to at any time.
STOCKS AND BONDS
Investing in individual stocks and bonds can yield higher returns but requires careful research and an understanding of market conditions. Diversifying your investments across a range of stocks and bonds can help mitigate risk.
FUNDS
Investing in mutual funds, index funds, or exchange-traded funds (ETFs) is a practical approach. Funds pool money from many investors to buy a diversified portfolio of stocks, bonds, and other securities. Professional management and reduced risk make funds an attractive option. The asset management industry offers a variety of high-quality investment portfolios catering to different time horizons and risk appetites.
DETERMINING YOUR LUMP SUM STRATEGY
Should you invest your lump sum all at once or spread it out over time, a strategy known as dollar-cost averaging? The choice depends on your risk tolerance.
Research from Vanguard suggests that immediate lump sum investment generally yields better results. Markets tend to rise roughly three out of every four years. Vanguard’s study showed that lump sum investing outperformed dollar-cost averaging about two-thirds of the time, with an average outperformance of 1.5% to 2.45%, depending on the country. Longer time horizons magnify these benefits.
Advantages of investing all at once include:
- Immediate market exposure
- Historically higher returns of stocks and bonds compared to cash investments
- Maximising benefits from market growth during upward trends
Slow and Steady:
Dollar-cost averaging involves investing a fixed amount at regular intervals, regardless of asset price. This strategy can help mitigate short-term market volatility and lower the average purchase price of investments over time. It’s commonly used in retirement savings plans.
Benefits of dollar-cost averaging include:
- Minimising downside risk
- Taking advantage of market volatility
- Avoiding regret if the market dips after a large investment
Wait and See:
Delaying investment is a form of market timing, which is difficult to execute successfully and is generally not recommended.
WHAT TO DO NEXT
It’s best to work with a financial adviser to make a savings and investment plan to ensure your strategy meets your needs and goals.
This will give you the right information to assess and choose secure, suitable, affordable and sustainable investment products.
