A typical single-time investor tends to yield greater returns than an investor reliant on fixed income.
Rich investors often ponder: Should they invest the whole sum straight away or divide it into parts over a longer period to make the most of potential price changes? Research conducted by HQ Trust GmbH offers insights into the investment strategy that yields the most benefits depending on individual circumstances and risk tolerance.
ntv.de: Your study looked into investing a large sum of money all at once or dividing it into portions over a medium-term period. Can you please elaborate on the methods you used?
Pascal Kielkopf: In our research, we contrasted two investment strategies: the "Lump-sum investor" who invests the entire sum immediately and the "Installment investor" who disperses the capital equally over 24 months. Both strategists invested in the global stock index MSCI ACWI. The study considers rolling two-year periods from 1971 to August 2024.
What prompted you to conduct this study?
Numerous investors grapple with the dilemma of investing a substantial sum of money all at once or investing it incrementally to minimize risk. Further, with the alarming inflation rates currently observed, money stashed in savings accounts loses value, giving capital markets, particularly stocks, an attractive edge. Our study examines these two approaches.
What were the primary findings of your study?
The lump-sum investor averaged two percent more return than the installment investor at the end of two years. Nevertheless, this came with greater volatility. Investors with a cautious approach and who wish to even out possible price fluctuations may find investing in installments more advantageous. Optimal results are achieved by dispersing investments over a maximum of two years, avoiding the risk of leaving potential returns untapped. Maximizing returns calls for the lump-sum investment approach, but bears the risk of unfavorable market entry points.
So, does the lump-sum investment strategy suit risk-tolerant investors?
Yes, lump-sum investors confront the possibility of entering the market at an unfavorable time if prices are high. However, installment investors spread risk across various price levels, while potentially missing out on interim returns by not being fully invested.
Is a middle ground the advisable course of action?
Generally, yes. Dispersing investments over six months to a year may be a reasonable choice. This empowers investors with flexibility and decreases the risk of poor timing.
Does the cost-average effect seriously come to play, as it implies that frequent investments at a fixed amount result in a lower average entry price compared to one-time investments? Yet, why didn't this pattern emerge in your study?
The cost-average effect works theoretically by buying more shares when prices are low in a volatile market. However, in the long run, businesses tend to rise, leading to the payment of more substantial prices later and acquiring fewer shares. Our analysis suggested that the cost-average effect could yield favorable results in approximately one-third of scenarios.
Although the cost-average effect registers fewer advantages, does it have advantages of its own?
Indeed, psychological advantages are notable. Many individuals favor investing portions rather than investing the total sum at once. Should the market drop, they can buy stocks at cheaper prices, soothing anxieties and reducing the fear of incurring losses.
Should novice or risk-averse investors diversify their investments over time?
Newcomers who are acclimating to market volatility can gain from diversifying over time, although a long-term approach is paramount. In two years, both investors will be fully invested, and the subsequent period holds more weight in the long run.
What exactly does this entail?
Asset allocation, including distributing capital across various asset classes such as stocks, bonds, or real estate, is essential. For instance, owning an ETF stock mix can diminish risk by miscueing bond funds into the mix. The suitable mix depends on risk tolerance and investment horizon. Younger investors with longer investment horizons can often possess a more substantial portion of stocks.
Does the rule of thumb "100 minus age = stock quota" hold credence?
This guideline proves far too general. Elderly investors who intend to leave their portfolios to their heirs may also hold a more substantial stock quota. Younger individuals who require their funds for substantial investments, like real estate, in the near future should maintain a more cautious approach and invest less in stocks.
Any concluding remarks?
In the long run: Investing capital early yield the most benefits. The "rule of 72" serves as a strong influence for wealth accumulation, as early investors profit from the "rule of 72." However, the markets' continuation of their exemplary performance in the future is not guaranteed.
Julia-Eva Seifert engaged in conversation with Pascal Kielkopf
Disclaimer: This content does not advocate for the purchase or sale of specific stocks or other financial instruments. We do not assume liability for the accuracy of the presented information.
The research conducted by HQ Trust GmbH provides investment advice, suggesting that lump-sum investors may yield a higher return of around 2% over two years, but with increased volatility. On the other hand, investors with a cautious approach may find more advantage in investing in installments to even out potential price fluctuations.
When considering investment advice, it is essential to consider individual circumstances and risk tolerance, as the optimal investment strategy varies depending on these factors.
