How to Invest a Large, Lump-Sum of Money

How would you go about investing a large, lump-sum of money into your investment portfolio? Say $100,000, $500,000 maybe even one-million dollars? Would you invest it all at once or are there other approaches worthy of your consideration? Well, stay tuned and watch today’s video because these are just some of the important questions that I will be addressing.

Let’s say that you came into a large sum of money, perhaps from selling a home, piece of real estate, a large position in an individual stock or from an inheritance.

Two of your options for investing monies are as follows::
1. Invest the entire lump-sum into diversified portfolio all at once
2. Dollar cost average the funds into your portfolio over a longer period of time

According to Investopedia.com, "Dollar-Cost Averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals; in effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices. Dollar-cost averaging is also known as the constant dollar plan."

When investing a large, lump-sum, dollar-cost averaging is used as a risk mitigation strategy, not necessarily a performance maximization strategy, meaning dollar-cost averaging may not produce a greater return than putting all monies in at once. The strategy that proves to be the most profitable will depend on the performance of the global financial markets and that is something that is going to be unpredictable, particularly in the short-term.

Dollar-cost averaging does help ensure that new monies are not invested at a temporary market high where the investor is forced to endure a market correction or bear market shortly after making such a substantial investment.

This strategy is designed to help an investor deploy a large amount of money into a well-diversified portfolio without having to concern themselves about the timing of the contribution in relation to the future short-term performance of the global financial markets.

Dollar-cost averaging into a portfolio will potentially be more beneficial the more volatile one’s portfolio is or the greater one’s allocation to stocks.

If one’s portfolio is largely allocated to fixed-income securities or bonds, the less volatile the portfolio will be and the less effective this strategy may be.

Example:

If you were to inherit one-million dollars, rather than invest 100% of the funds into your globally diversified portfolio, you may choose to invest $50,000 a month on the first business day of the month, until your entire one-million dollar inheritance was invested. This would take approximately nineteen months from the date of the first investment.

You may also choose to invest $100,000/month until all of the funds were invested.

There is no one right way to dollar-cost average into one’s portfolio, merely options for the investor to consider. The most suitable one being the dollar amount that the investor is comfortable with and can stick until all of the funds are invested, despite the performance of the financial markets.

I would like to note that the dollar-cost average strategy would not be warranted if an investor was redeploying funds that had previously been invested in a diversified portfolio and was simply moving the funds from one account to another. An example of this would be rolling over funds from a 401(k) account into a Rollover IRA. If the funds were invested while in the 401(k) then I believe it is advisable to reinvest those funds into a globally diversified portfolio as soon as possible.

The dollar-cost average strategy is best suited for new monies that were not invested in a diversified manner.

If you are a client of mine and need to review your options for investing a large lump-sum of monies into your portfolio, then I invite you to give me a call.

For more information on my advisory services, please visit: https://www.maywealthstrategies.com

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