Lump sum investment

... Credit :
Shadrach   in Finance & Money

Last updated: 28 January 2020, 06:40 GMT

Envision it: you have a pile of cash. You've cleared your obligations, and figure you’d want to invest in stocks.

What's the ideal approach to grow the money? Hence, by putting a rate of the lump sum in your chosen stocks every month?

For example, an imaginary client has a growing mutual fund, let’s say he invested in stocks and shares, and an arrangement of stocks they need to claim. We are going to scrutinize which approach is better in investing, putting the money all at once, or invest one at a time.

For an instance, a “Pound Cost Averaging” is one of many ways towards purchasing a stock at a normal interval, in a monthly basis. Let’s have an example of a potential investor with a whole amount of £100,000 or he may decide to contribute £8,333 per month over a year.

The advantage of this approach is, as the stock value changes from time to time, the investor would be thinking whether to purchase at both the high and low points, implying that the normal value paid will level out after some time. The thought is that the financial specialist won't miss out if the market out of nowhere drops in the wake of contributing the whole amount.

Pound cost averaging sounds great at that point. However, there are a couple of disadvantages.

By keeping down the cash and astonished investments, there is a possibility that the assets would change. For example, a £100,000 portfolio may go from having 80% of your interest in stocks and 20% in securities, to 40% stocks, 10% securities, and half money, while you keep down cash to contribute over the coming months.

Warily, the stocks being invested at a longer period of time has a bigger possibility in returning more money to the investors.

For that reason, there is a possibility that investing a larger amount in your shares is not a good idea. 

Which brings me to the other negative effect of “Pound Cost Averaging”, the tendency of the market increasing than decreasing.

Furthermore, let us analyze the other option – “Investing it all at once” approach.

To the wise financial specialist, contributing a whole amount at once sounds frightening. In an exposition, there are unsettled issues that the stock prices may decrease further than expected. In a trending business sector, individuals are anticipating for the last days. The expected results may be disappointing.

There are some who considered that lump sum investment is a better opinion than the other approach, taking into a consideration is the author of “The Simple Path to Wealth” JL Collins.

Collins contends that by pound cost averaging you are wagering that the market will go down. However, the history has demonstrated that over the longer periods, the securities exchange will in generally go up.

It is said that the dividends may also earn more than the interest your savings account is offering as of the moment.

Every investment is worth the risk, but it is up to the investor whether to take the risk or not.