Invest in monthly contributions or big lump sums?

[ekonstan]

Hello everyone,

I had in mind to find a scheme to be able to throw a percentage of my monthly salary into an investing account monthly.

A few days ago, I met with a financial advisor who adviced me to save my money into a savings account and when I have a lump sum of 35,000 euro, then invest.

What makes more sense? I know it will depend on many other factors, but which is the most usual way?

[cardtrick]

Large sums are better. Lower transaction costs.

[disneysteve]

I met with a financial advisor who adviced me to save my money into a savings account and when I have a lump sum of 35,000 euro, then invest.

Did he explain his reasoning? Why park your money in a low-yielding account if it is money intended for long-term investing?

What makes more sense? I know it will depend on many other factors, but which is the most usual way?

The usual answer is dollar-cost-averaging, meaning you invest a set amount on a regular schedule.

Large sums are better. Lower transaction costs.

That's only true if you are investing into something that has a sales commission. If you are buying mutual funds or fee-free ETFs, it wouldn't make any difference.

[Wino]

Invest it when you have it and can afford to leave it for at least 5 years.

Note that "at least" means "at a minimum." It is better to just invest it, and walk away until you absolutely must have it.

[Augustine]

Waiting for a lump sum can lead to procrastination.

You want to strike a delicate balance between savings and investments so you do not keep liquidating your investments to take care of 'ordinary' expenses.

[ekonstan]

So from what I understand, there is no real "best practise"

[Wino]

So from what I understand, there is no real "best practise"

That's because no one knows what's going to happen in the future. If you're looking for "Best odds," then buying immediately with a lump sum wins about 80% of the time; however, if the time when you buy lump sum is in the 20% side of that, then it isn't the best plan.

So, to alleviate both of those in your situation, you should NOT hold your money for one lump sum investment. By investing over time as you get the money, you have used a practice called "dollar cost averaging" which eliminates short term spikes (up or down) from having a major effect on your investments.

The historical "best practice" has been to invest regularly and for relatively long terms. If you aren't investing for at least 10 years, you're probably better off just accepting the interest from a CD or savings account. If you're investing for the long-haul, then index funds have proven to be hard to beat. If you're very savvy and willing to spend the time and effort, then you could try beating the S&P or Total Market indexes, but that's usually a bad bet. Who knows, though? You might find you've got a knack for it, and maybe Warren Buffet will be bidding to have lunch with YOU in five years. (But I doubt it.)

As to your original question, that's a bad plan altogether. The stock market is up considerably this year. Had you put 2500 per month into an indexed mutual fund starting in January 2013, you'd be much better off than had you held that money in a savings account waiting for some magic number; however, if the market tanks tomorrow, then you would have been better off in the savings account. In general, that adviser's advice is wrong in most cases.

[disneysteve]

The usual answer is dollar-cost-averaging, meaning you invest a set amount on a regular schedule.

Invest it when you have it

Waiting for a lump sum can lead to procrastination.

So from what I understand, there is no real "best practise"

All 3 of us have said there is a "best practice". Invest over time, not in a lump sum.

Now if you have a lump sum right now and want to know what to do with it, that's different, but you're asking about waiting until you've saved up a lump sum and for that, I think we are all saying the same thing: don't do that.

The only possible exception is if you want to get into an investment that has a certain minimum. For example, Vanguard has a $1,000 minimum investment. If you don't yet have $1,000, you can park money in savings until you have enough and then open your account. After that, though, you should feed money in as you have it. Don't wait for another lump sum.

[feh]

The common question regarding DCA vs lump sum is usually the reverse posed here. Usually, it's "I have a large amount of money. Should I invest it all now, or DCA?"

Oddly, that's not the question here. The question here is, "should I save up my monthly surplus for a long time, then invest it all?"

The quick answer is: invest as soon as you have the money. In the OP's case, that translates to DCA.

[rigz]

The common question regarding DCA vs lump sum is usually the reverse posed here. Usually, it's "I have a large amount of money. Should I invest it all now, or DCA?"

Oddly, that's not the question here. The question here is, "should I save up my monthly surplus for a long time, then invest it all?"

The quick answer is: invest as soon as you have the money. In the OP's case, that translates to DCA.

I actually have the other question - how to invest a lump sum that I already have?

Should I dump it all into my investments now or still DCA?

[feh]

I actually have the other question - how to invest a lump sum that I already have?

Should I dump it all into my investments now or still DCA?

Same answer applies - invest when you have the money. That's the correct answer mathematically.

Psychologically, it varies from person to person.

[rigz]

Same answer applies - invest when you have the money. That's the correct answer mathematically.

Psychologically, it varies from person to person.

Kind of expected and feared that answer.

Due to many years of laziness, procrastination and being uninformed on investing I have saved up a ton of money sitting basically in cash in the bank.

To throw it all into investments at once is scary - especially since the market is up so much recently.

[soogar]

Kind of expected and feared that answer.

Due to many years of laziness, procrastination and being uninformed on investing I have saved up a ton of money sitting basically in cash in the bank.

To throw it all into investments at once is scary - especially since the market is up so much recently.

Why don't you put it in a CD?

[rigz]

Why don't you put it in a CD?

CDs barely pay more than my ing account

[feh]

Kind of expected and feared that answer.

Due to many years of laziness, procrastination and being uninformed on investing I have saved up a ton of money sitting basically in cash in the bank.

To throw it all into investments at once is scary - especially since the market is up so much recently.

The implication of your comment is that it cannot continue to go up because it has been recently. It's a common thought, but it's based on a fallacy.

You have to do what you're comfortable with. If that means DCA, then so be it.