The myth
Investing a huge amount of money all at once can feel like you’re taking on a lot of risk. It can be scary if you fear making a bad decision or getting your timing wrong.
This worry may be even stronger if you’re an investor with a low risk tolerance or if you’re just about to start investing.
To avoid mistakes or minimize potential loss, many believe that they shouldn’t invest a lump sum. They may prefer spreading their money out through smaller investments.
The reality
If you’re not yet financially ready, it’s not advisable to invest a lot of money – or any amount at all. Being prepared to invest means you have enough money for emergencies and your debt is under control.
If you’re in a good position to invest and have just received a huge sum, then you’re likely left with 2 options. Should you invest everything in 1 product or invest smaller amounts over time in 1 or more assets?
When investing a lump sum, here are some potential risks you might encounter:
- You may face market timing risks
Timing can matter if you’re thinking of investing in a product whose value tends to go up and down a lot, like stocks. To maximize your potential returns, you’d want to buy when prices are relatively low.
However, markets can be unpredictable. There’s a risk that you’ll invest when prices are high or face a downturn soon after.
This might lead to significant losses especially if you made a big 1-time investment and need to withdraw during a bad time.
Spreading out your investments – through methods like peso-cost averaging – can lessen the impact of sudden market changes.
- There may be better ways to allocate your money
Another thing you’d want to look at is your investment portfolio. It can tell you whether it’s OK to go all-in on an investment or if it’s ideal to consider other opportunities.
If your portfolio isn’t diversified enough, you might be able to strengthen it through a mix of products that can help fill in any gaps. The same principle would also apply if this was your first investment.
Though there are risks, lump-sum investing isn’t always a bad choice. It can make sense in cases like these:
- You’ve done your research
You may already have a plan in mind for where you’ll allocate the money. Investing the entire sum might be a good move if you understand the product you’ll invest in and are fully confident about its growth potential.
Going all-in may be the way to go if your chosen investment matches your risk profile and goals as well as your diversification needs.
- You’re investing for the long-term
Any near-term fluctuations in price won’t be a huge concern if you plan to hold on to an investment for a long time. This eases the pressure of identifying the perfect time to invest in order to avoid buying high and selling low with a lot of money at stake.
Investing a larger amount upfront might also be beneficial when you consider compounded growth. Think of it this way: a 5% return on P50,000 is a lot more than a 5% return on P5,000.
The potential returns on a lump-sum amount might grow even more if you’ll stay invested and let your earnings compound over the years while continuing to add money.
Verdict: It depends.
Figuring out how to invest a huge amount of money is a good problem to have, though it can cause valid concerns given the potential risks.
It’s always best to assess your financial situation, goals, and strategy to know how much to invest at once.
A lump-sum investment may not be a bad thing if it fits your circumstances. There’s also nothing wrong with spreading your money out if you believe this is the more effective method for you.
Investing smaller amounts on a regular basis via peso-cost averaging can also be very helpful so you can build, monitor and tweak your portfolio one payday at a time.
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