Should You Invest All At Once or Spread Over Time?

Picture the scene: you’ve just come into a bit of money.

It’s from a loved one who has given one caveat: the cash should be invested in the market so its value isn’t eroded by inflation.

That’s all fine and good, but it leaves you with a bit of a dilemma: should you do this all in one go… or gain exposure to stocks and shares a little more gradually? 

This second strategy is known as cost averaging — and it’s different to making a regular, set investment every month. Why? Because in this scenario, you may split the money into a number of equal parts and gradually drip feed it into the market.

It’s understandable why this can be appealing, and seen as less risky than making a single investment with the whole lump sum.

What if the market suddenly crashed in the days and weeks after making a big investment, wiping an eye-watering amount from your portfolio?

But equally, cost averaging also has downsides.

If your stocks were to suddenly rally while you’ve got cash sitting on the sidelines, you’d miss out on chunky returns — gains that could have benefitted from compounding in the years ahead. It’d also mean that any investments you’re making will be much more expensive.

What the numbers say

Back in February 2023, Vanguard released research that compared lump sum investing and cost averaging side by side — using historical data from 1976 to 2022 to see which tactic worked best in the past.

In this scenario, $100,000 was invested for 12 months. For lump sum, the whole lot was piled into the market on day one. And for cost averaging, the cash entered the market over three months, meaning the money was only fully invested for nine months of the year.

Here’s what ended up happening on average:

Strategy	Lump sum	Cost averaging
100% stocks	$111,940	$109,580
60% stocks, 40% bonds	$109,360	$107,453
40% stocks, 60% bonds	$107,648	$106,400

As you can see, lump sum investing beat cost averaging across the average of each portfolio, but not by too much.

In the 100% stocks allocation, the lump sum’s end value was 2.2% more than if cost averaging was used.

But of course, this doesn’t really tell us the whole picture.

While this may be what happens on average, it doesn’t account for when the markets are in a boom or bust cycle.

Vanguard found that the returns from lump sum investing widens substantially during a rally, and cost averaging only edges ahead narrowly on the rare occasions when stocks endure a significant crash.

Across all portfolios (rather than the average), lump sum investing bested cost averaging 68% of the time.

And that brings us neatly to the three things you should carefully consider when weighing up lump sum investing versus cost averaging:

• Your appetite for risk
• The length of time you’re planning to be in the market
• Whether you’re a ‘loss averse’ investor

Loss aversion

Loss aversion is a fascinating area of behavioural economics, and it can be boiled down to this: for many people, losing £1,000 feels a lot worse than winning £1,000.

Psychologists Amos Tversky and Daniel Kahneman actually found that the pain of loss is actually twice as significant as the pleasure of a gain. 

Researchers at Cornell University put it another way.

Imagine your boss sits you down to talk about your salary. What would affect you more psychologically: being told you’re going to be paid £500 less each month, or learning you’re getting a £500-a-month pay bump?

Here’s how the feeling compares between someone who has loss aversion and someone who doesn’t:

So what this tells us is pretty simple: weighing up the decision on whether to lump sum invest or cost average often hinges upon how well you know yourself.

If you think you could cope with the prospect of your portfolio taking a battering in a black swan event, in the hope of potentially securing greater returns, a lump sum approach could be for you.

But if you’re pretty confident that you’d end up kicking yourself — and potentially even start making erratic decisions and chasing those losses — cost averaging may be more sensible. Although the Vanguard study suggested you could end up with slightly smaller returns, think of it as an insurance policy.

Remember: historical performance doesn’t indicate future results. All investments have risk.

Vanguard’s research also helpfully threw in the element of risk tolerance when comparing lump sum and cost averaging — and this refers to whether you’re willing to endure fluctuations in the stock market in pursuit of bigger gains, or would prefer a more certain outcome.

It found that — for investors who don’t have loss aversion — those with an ‘adventurous’ or even ‘moderately conservative’ risk tolerance should still consider lump sum investing, and only those with a ‘very conservative’ persona should go for cost averaging.

Meanwhile, among those who do suffer from loss aversion, only adventurous investors with an appetite for risk should still pursue lump sum.

There was a word of caution from Vanguard though: investors who turn to cost averaging should try and drip feed their money into the market sooner rather than later.

Why? Because making an investment over six months has traditionally led to lower returns than someone who cost averages over three months.

There’s one final factor worth mentioning here, and it relates to a motto of the billionaire investor Ken Fisher: “Time in the market beats timing the market.” 

While it’s understandable that investors would want to avoid sharp downturns that hurt their portfolios, JPMorgan data shows that seven of the best trading days on the S&P 500 over the past 20 years happened within 15 days of the 10 worst trading days.

Missing these best days can also have huge ramifications for a portfolio’s performance, as this table showing annualised returns for the S&P 500 between January 2004 and January 2024 shows:

Best trading days missed	Annualised performance
None	9.8%
10	5.6%
20	2.9%
30	0.8%

Fidelity put this a different way by illustrating how an investment of $10,000 into the S&P 500 in 1980 would have ended up by December 2022 — again factoring in the impact of missing this index’s best days. The results are pretty sobering: 

Best trading days missed	Final balance	Missed growth
None	$1,082,309	$0
5	$671,051	$411,258
10	$483,336	$598,973
30	$173,695	$908,614
50	$76,104	$1,006,205

It’s pretty staggering to think that missing just five days in 42 days could cost $411,258.

And it’s worth thinking about this through the lens of cost averaging for a moment.

What if one or more of these days were to happen while your cash was parked in a savings account? How would this affect your portfolio’s ability to grow and flourish? Would there also be a risk of some loss aversion here, painfully aware that your nest egg could be looking much healthier if only you’d jumped straight into the market? 

There’s a lot to think about here — and no straightforward answer.

It’s like deciding between investing or overpaying your mortgage, and a lot will come down to your mental position more than what the numbers say on their own.

We’re all different, from our financial circumstances right through to our attitudes towards investing.

There’s also ISA limits to think about — £20,000 a year.

But if you’re planning to keep a large chunk of money invested for years or even decades to come, you may start wondering whether there’s any point in holding some of it back for a few months.

This is not financial advice. Speak to a qualified financial adviser if you need assistance. All investments have risk.

Using an auto-enrolled work-based pension?

The fund you're contributing to might not be right for you

Send The Info