What is the best way to invest your money — in lump sums or regular amounts?

While both methods come with benefits for investors, they also carry risks

Illustration by Mathew Kurian 

There are two ways of investing in the stock market — paying in lump sums when you have a bit of money to spare, or investing a regular amount every month for years or decades.

While the lump sum gives you an instant hit but is potentially riskier, regular investing is more of a slow burn — offering a potentially smoother return.

Which works for you will depend on personal factors, such as how much money you have at your disposal, and your attitude to risk.

If you are lucky enough to have a lump sum at your disposal, the sooner you put money into the stock market, the longer it has to grow.

Say you have $100,000 (Dh367,300) and invest it all in shares today, if stock markets rise by an average 7 per cent a year, your money will have grown to a whopping $1,497,446 after 40 years.

The best time to invest is as soon as you get paid, before you spend your salary on something else.

However, if you invest $2,500 a year over 40 years, you have still invested $100,000 in total but will end up with a much smaller sum of $534,024, assuming the same growth.

Therefore, the simple answer is, yes, lump sum investing is better than regular monthly investing, but with two drawbacks. First, not everybody has such a juicy sum to hand; the second is that investing it all in one go can backfire if markets crash the next day, and your lump sum is suddenly worth a lot less.

Moukarram Atassi, head of investment management at National Bank of Fujairah, favours lump sum investing. "To take maximum advantage of compounding stock market growth, it pays to deploy your money sooner rather than later," he says. If you have the capital and can stomach volatility, this should give you greater long-term gains.”

He also understands that it makes some investors nervous. “Clients often ask what happens if they invest a lump sum, and the market makes a downturn soon afterwards. If this is a worry, lump sum investing is probably not for you," he adds.

Regular contributions can reduce risk by smoothing out the market peaks and troughs. “This is a more defensive strategy, especially during market volatility or steep corrections," says Mr Atassi.

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However, there is another way of reducing the risks when investing a lump sum, he adds: "You could put the money into a multi-asset portfolio of global equities, bonds, property funds, gold and alternative investments, which gives you diversification if share prices slump.”

Ultimately, the decision is personal. “It depends on your financial circumstances, goals and more importantly, whether you can sustain a sharp drop in the value of your investment, in a market correction,” he says.

Investing a lump sum has an element of a gamble about it, as your success partly depends on chance, says Yves Bonzon, chief investment officer at private bank Julius Baer. "You could invest at exactly the right time, and the market starts to rise the next day. Or you might be unlucky and it collapses instead.”

He says professional investors prefer not to rely on luck: “It's a much better approach to build your portfolio over a period of time.”

So if you have a lump sum, Mr Bonzon recommends drip feeding the money in over a period of, say, six months, to reduce risks.

Ben Barber, UAE financial blogger at www.buildingwealthwisely.com, says your decision may also rest on where the money is coming from. "Say you invested $100,000 you had inherited from your parents or grandparents, only for the market to fall by half. You'd probably feel dreadful, as you felt a responsibility to steward that money."

In that case, spreading your investment over a number of months is a happy compromise. “It balances human nature against investment logic,” he says.

Windfalls are rare, so in practice most people can only afford to invest from their regular income.

The problem is that regular investing is a bit like regular exercise, we know we should do it but find it all too easy to put off, Mr Barber says.

“The best time to invest is as soon as you get paid, before you spend your salary on something else," he adds. "You quickly learn to live on what is left, and before long, won’t even miss it. You may even come to enjoy the process, knowing you are building long-term wealth for your future.”

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For expatriates earning in one currency but investing in another, investing regularly has the added advantage of smoothing out foreign exchange fluctuations, Mr Barber adds.

Beware of charges though, as you can sometimes pay more for regular monthly investments, even on a low-cost online platform, than for lump-sums.

Mr Barber picks out one more benefit of regular savings: if you can automate the process, you can largely forget about it and don't have to worry about stock market volatility. “It is one of the few ways of mastering your emotions and the markets," he adds.

Mark Chahwan, co-founder and chief executive of UAE-based robo-adviser Sarwa, says by investing regularly, you also benefit from something called "dollar-cost averaging", which works to reduce stock market volatility.

If you invest every month, in regular chunks, you average out the amount you pay for a stock or fund. Say you buy three shares in a company trading at $110 per share for $330. Next month, the share price has fallen to $100, and your three shares cost just $300. Next month, the share price has dipped again to $90, and you pay $270.

Mr Chahwan says this means you bought nine shares for $900. “If you had invested $900 in month one, you would only have eight shares because the price was higher," he adds. "Dollar-cost averaging got you a better deal.”

This can work against you when a share price is steadily rising, but averaging out your payments spares you the agony of attempting to time the market, Mr Chahwan says. "Trying to buy stocks at the right time is a stressful exercise that rarely pays off, and usually leads to underperformance.”

Dollar-cost averaging also means you can actually benefit from stock market volatility. That's because if markets fall, your monthly contribution picks up more stock.

A stock market dip can also be a good time to pay in a lump sum, because again, your payment picks up more of a particular share. It isn't easy to do, though; you have to be disciplined to invest when share prices are falling and investors are panicking.

Christopher Davies, chartered financial planner at The Fry Group, Middle East, says investing a lump sum exposes your capital to the market for a longer period, but the prospect of a higher return comes with a higher risk.

So you need to work out your attitude to risk and talk to your adviser if you have one. "Then you can allow for short-term volatility within a long-term investment strategy.”

Mr Atassi says both lump sum and regular investing beat the other alternative of "doing nothing.”

The best option of all is doing both. You can never invest too much, or too often.