The S&P 500 is the “Standard and Poor’s 500” which is a stock marketing index that tracks the stock performance of the 500 largest companies in the United States. This means that it’s a one place to check on how the overall economy is going. If the S&P 500 is going up, generally, all businesses are performing well. If it’s going down, there are general problems in the market.
The S&P 500 is the “Standard and Poor’s 500” which is a stock marketing index that trackings the stock performance of the 500 largest companies in the United States. This means that it’s a one place to check on how the overall economy is going. If the S&P 500 is going up, generally, all businesses are performing well. If it’s going down, there are general problems in the market.
As you can see, there have been times where the S&P are going up and times when it’s going down. Notice the times when the market is decreasing, staying flat for years, and growing. Statistically, the S&P has increased 10.15% year over year (1957 through Dec 31, 2022).
So ask yourself, is it likely that the future will have the same returns? No one knows. Is it possible it will drop or stay flat? Potentially. But this system is the best we have.
What should I do with $10,000?
If you’ve saved, gambled and won, or inherited some money, what should you do with it? There are many places you can put money to hopefully make more. One of these options is to put it into the stock market by buying indexes though mutual funds or ETFs. All banks will sell you mutual funds that have historical returns and fees for them to manage it for you. All brokerages allow you to set up various account types, and invest on your own. (Learn about the Canadian account types.)
The purpose of this article is should you put all your money in at once into something (lump sum), or should you slowly buy into something? Statistically, you should lump sum to maximize the amount of time your money is in the market. Let me challenge that.
But first, I’m too scared of the stock market!
Three of the top reasons people don’t invest are:
- It’s too risky.
- It feels like gambling.
- You can’t beat the market, so don’t bother.
Many people don’t even invest because of these fears, and many people that lose money in the stock market freak out, pull their money out, and are too scared to try again. If you look at the chart above, what should these people have done instead? Just leave their money in the market.
Imagine working so hard and having your investments drop! Yuck! But statistically, it’s a tough challenge to just leave your money there.
So let’s get into it, should you invest with a dollar cost average or lump sum?
Advantages and Disadvantages of Dollar Cost Averaging
Dollar cost averaging is a strategy where you invest a fixed amount of money at regular intervals over a set period of time. This strategy is particularly beneficial for individuals who are risk-adverse and want to minimize the impact of market volatility on their investments. By investing at regular intervals, you can avoid investing a large sum of money at a market high. Dollar cost averaging is an easy and convenient way to invest, as you can automate your investments to set it on autopilot which frees up you time for regular life.
However, one of the disadvantages of dollar cost averaging is that it can result in missed opportunities. If the market is on an upswing, you may miss out on potential gains by investing a fixed amount at regular intervals. On the other hand, if the market is on a downturn, you may end up buying more shares at a lower price, which can be beneficial in the long run. Additionally, dollar cost averaging may result in higher transaction costs, as you will be making more frequent trades. Nonetheless, these costs can be offset by the benefits of investing at regular intervals.
Advantages and Disadvantages of Lump Sum Investing
Lump sum investing is a strategy where you invest a large sum of money all at once. This strategy is particularly beneficial for individuals who have a lump sum of money that they want to invest like an inheritance or a bonus. One of the advantages of this strategy is that it maximizes your potential returns. By investing a large sum of money all at once, you take advantage of any potential gains in the market.
However, one of the problems with lump sum investing is that it can be risky. If the market is on a downturn, you may lose a significant amount of money. This risk can be mitigated by investing in a diversified portfolio that includes a mix of stocks, bonds, and other assets. Also, lump sum investing requires a large amount of capital upfront which may not be possible for everyone.
Wait, so should I do a lump sum or dollar cost average my investment?
Both dollar cost averaging and lump sum investing have their advantages and disadvantages. The best strategy for you depends on your investment goals, risk tolerance, and financial situation. It is important to consult with a financial advisor before making any investment decisions.
Statistically, lump sum investing will do better, but the bigger risk is freaking out, giving up, and selling for a loss. Because of that, I recommend to dollar cost average you way in for your own mental health. It’s easier to mentally manage a smaller loss and stay the course, and it’s OK to have a little regret missing out on a little gain. For this reason, you’re more likely to keep your money in the market which has historically done the best over time.
Remember, investing is a long-term game, and it is important to stay disciplined and stick to your investment strategy over time. Good luck!
