Should you invest a lump sum all at once or gradually?

Elke Brink of PSG Wealth discusses the merits of both strategies, and whether a combination of the two will yield better returns.

BOITUMELO NTSOKO: Welcome to the Money Savvy podcast. I’m Boitumelo Ntsoko. When investing a lump sum, should one do so all at once – or is a gradual strategy better, and which option will yield higher returns? To shed light on this we are joined by Elke Brink, who is a certified financial planner at PSG Wealth. Welcome, Elke.

ELKE BRINK: Thank you for having me, Boitumelo. It’s always nice to be here.

BOITUMELO NTSOKO: What do studies say about the effectiveness of lump-sum investing versus gradual investing?

ELKE BRINK: I think there are definitely benefits to both. When it comes to investing I think it’s important to always go back to the basics and remember the principle of what you’re trying to achieve once you have exposure to the stock market. The main recipe for success is having time in the market, and the more time the better. It’s factually impossible to try and time the market.

So I would always say yes, ‘it’s not about trying to time the market, but time in the market’. When it comes to investing a lump sum, for example – of course, if you have a lump sum available – [with] whatever you have available to invest, the sooner the better.

You can spend more time in the market, [and] you can possibly benefit from more positive days.

Quite an interesting study that has been done: if you look at not only the JSE but also the global market over a 50- or even a 100-year period, there are normally only around 50 really good days, which is actually a little if you think of such a long period of time. Whereas, if you miss some of those good days – even if you just miss 10 of the best days in a 20-year period – your outcome looks completely different, which is actually quite interesting.

I think we can maybe share one of these graphs with the podcast [on] the benefit of investing a lump sum.

This graph analyses market performance since March 2002. It illustrates the effect of having remained invested for the entire period, compared to missing out on the best five, 10, 30 and 50 days of market performance, and being invested in cash. Source: Morningstar

This graph compares the S&P500 and the JSE since 2000. Contrary to what many would expect, the JSE has outperformed – significantly. Source: Morningstar

If you have more time, there are definitely benefits. If you don’t have a lump sum available and you want to invest on a monthly basis, I think for the average person this is sometimes the easier thing to do when it comes to cash flow. Maybe you’re earning a salary and you’re investing X percent of the salary every month, so you don’t necessarily have a lump sum available to invest, [so] this is a great route to follow as well.

BOITUMELO NTSOKO: I know some people consider maybe taking out a loan to invest that lump sum. Do you think that’s a good idea?

ELKE BRINK: At certain times in the market it’s definitely something you can consider. This normally comes down to two things, and I think it also answers [something] that a lot of people often ask: [should you] prioritise paying off your loan, or should you rather invest? I think this is always a very relevant question. It comes down to the current interest rate environment, and if we are looking at where we are at the moment and where we have been in the past two years, [we see] that we’re in an extremely low interest-rate environment and, together with that, we [also] look at what’s happening in the markets.

Now, if it was 2021 – last year we had exceptional returns in the markets both locally and offshore – then my advice would definitely have been you’d rather need to be in the market because your return is outperforming whatever you are paying for your loan or your interest rate by far. So it just makes sense to rather invest this and rather earn [the] high return.

At the moment if you were to ask me this today [I’d say] the markets are going through a very volatile phase, mostly because of the war [Russia/Ukraine] and a lot of things that are going on economically because of it. So the average return that we are earning at the moment – which is also a short-term answer maybe [because] none of us know how long this war is going to go on – but for the current few weeks, you’re not really earning a very high return. Then I would reconsider it and rather invest funds that I already have available [rather than] something from my loan.

But to answer your question, over a long-term period, when we look [at] equity exposure or stock market exposure, this will always remain the asset class that gives above-inflation returns – let’s say 10%, 12%-plus returns. But you need to have a little bit of time on your side.

If you have, let’s say, more than five years plus, equity exposure will always be a good thing in your portfolio. But if it’s a shorter-term decision you just need to weigh all the options.

BOITUMELO NTSOKO: When is the best time to lump-sum invest?

ELKE BRINK: I think that’s a difficult thing, because we never really know how to time the market. Ideally, you can read the market a little bit. You don’t want to completely buy in when the market is at an all-time high; or, depending [on] if you are also investing locally or offshore … there may be currency changes you need to take into account or currency timing in terms of maybe the strength of the rand.

But overall I would say try not to time the market because you never really know. None of us expected a war to break out just as Covid started to relax. You never really know what’s coming economically in the world.

Rather, if you have anything available to invest, invest immediately with the mindset that it’s going to be a longer-term investment.

So I think the moment you do start building an investment portfolio you always need to remember this is a bit of a longer-term plan.

Yes, we do have shorter-term investments as well and shorter-term goals. But mostly if you want to benefit from higher returns and equity exposure, you need to commit for longer periods of time. So I think if you anyhow have a lump sum available, I would say invest it and rather benefit from time in the market and time, basically benefitting from the positive returns the market’s going to give.

BOITUMELO NTSOKO: When investing offshore how does this situation then change?

ELKE BRINK: I think when investing offshore, if it’s a lump sum, you can time the rand a little bit more. If the rand is, for example, very weak at a moment, you might want to wait until the rand recovers a little or the rand is a little stronger. So there are possibilities that you can time the currency a little bit closer if you want to buy in at a good time. Once again, I think it’s quite difficult, especially with the rand being one of the most volatile currencies in the world. It’s not so easy to time it, but you can definitely, on a day-to-day basis, maybe just wait sometimes until you trade for a more optimal outcome.

I think when it comes to monthly investments – and that’s where the benefit also lies when you’re doing monthly contributions – should [they] only be local or should [they] be global?

This is a way of trying to time the market without physically trying to do it, because you’re now buying into the market on a monthly basis. Some months you may be buying at a high, some months you may be buying at a low. So, over an average period of time, you are trying to time the market on good days and bad days.

Sometimes you’re benefitting more because you’re buying in at a low and sometimes you [might be] benefitting a little bit less because you’re buying at a high. But that’s something you’ll never know with investing.

At least with doing the monthly contributions you are averaging the outcomes out. I think in terms of this, when it comes to offshore investing, when you’re doing it on a monthly basis, it also comes down to not only the physical assets or equities you’re buying, but also the currency. Let’s say the rand versus the dollar fluctuates quite a bit, at least by investing on a monthly basis you’re going to be averaging out the effects of it, because none of us knows exactly when the rand is strengthening or exactly when it’s going to be weakening, if there are some unknown variables that influence it. So doing it on a monthly basis at least gives you some opportunity to get the timing correct in terms of maybe a stronger rand.

BOITUMELO NTSOKO: Would using a combination of both gradual investing and lump-sum investing be a better way to invest?

ELKE BRINK: I think that can be the ideal. I think firstly, with a lump sum coming in, you have the bulk of the investment that’s starting to earn compound interest, and [you are] getting exposure to your equity portfolio or your diversified-investment portfolio. So that already makes a big difference in terms of, of course, the effect of compound interest and the return your portfolio can possibly enjoy by getting a bulk of the investment into the portfolio. Then, together with that, now you are adding monthly contributions to this and you get the two benefits of – let’s say it’s a local investment – at least trying to time the market a little bit and averaging it out. I think it’s also an easy way of investing, as I mentioned before.

In terms of cash flow, in terms of having the real discipline of investing on a monthly basis, I think one mistake a lot of investors make is we just simply wait too long until we start investing, or we wait for some sunny day whereas, if you’d rather just start early on and you start smaller and you can consistently do that – rather invest less, but you are able to do it on a monthly basis – and that’s going to have a much better return than waiting to have a big lump sum and maybe wait five years to be able to invest.

I think that is definitely the benefit of whatever you have available to invest, but then also continuing with a disciplined manner on a monthly basis.

BOITUMELO NTSOKO: Okay. I don’t know if you’ll be able to answer this, but could you maybe give us an idea of what this kind of strategy – where you combine both methods – would look like when constructing an investment portfolio?

ELKE BRINK: Definitely. I think it would depend on what the investor’s current portfolio looks like. Let’s say it’s a completely new portfolio we’re starting to build. I think it’s always important also to remember that the ideal portfolio will always consist of a few different products, because every product has a different role that it plays in your life. So you will, for example, have a retirement type of portfolio. Maybe it’ll be your pension fund or your provident fund at work, or a retirement annuity in your personal capacity. Perhaps together we will build in an emergency fund or a shorter-term investment which will be something accessible.

Perhaps let’s look at a scenario that normally happens around the end of February or at the end of a tax year, [when] we do a calculation for each investor. If you have a tax benefit you haven’t utilised on your annual tax benefits you can add a lump sum to a retirement annuity, and you can still benefit from this before the end of February, perhaps adding lump sum to your retirement annuity before the end of every February, or a lump sum to your tax-free investment, should you have one. This is also a product that works with the financial year or the tax year that you can optimise before the end of February.

A lot of people prefer to just do lump sum into the investment once a year. Then together with that, into the rest of your portfolio, should it be your monthly retirement savings or your monthly emergency fund savings or a combination, you can save this on a monthly basis, doing a R500 or minimum of R500, and you can go upwards from there monthly and just consistently remain with that.

I think it also depends on what your type of income structure is. Maybe you’re a commission earner, or maybe you earn bonuses and get the bonus at a certain time in the year, and you have this lump sum available you can invest. So I think if there’s anyhow something additional that comes into your income earnings, there’s this lump sum that becomes available that you can rather utilise in a good way.

I think it’s important to also try to make a wise decision. If it’s a bonus or an inheritance or a gift or some or other additional funds that don’t form part of your normal income salary, you can always opt to invest this.

BOITUMELO NTSOKO: Thank you, Elke. That was Elke Brink, who is a certified financial planner at PSG Wealth.

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