Pros And Cons of Lump-Sum Investing | Bankrate (2024)

Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.

As investors, we often hear the virtues of investing gradually over time to build wealth. But sometimes we are faced with investing a lump sum.

Lump-sum investing means that you take all or a large portion of your investable cash and invest it all at once. A lump sum could be $10,000, $50,000, $200,000 or any amount that is large given your situation.

You might find yourself with a lump sum for any number of reasons. Perhaps you received an inheritance. If you recently left an employer and rolled your 401(k) over to an IRA, you’ll need to invest this lump sum.

Pros and cons of lump-sum investing

Lump-sum investing comes with a number of advantages and disadvantages that investors should be aware of.

Pros

  • For a long-term investor, it pays to put your money to work as soon as possible. With the normal trend of the market going up over time, you can expect to ride out any bumps along the way over the next 15, 20, 30 years or more.
  • Investing a lump sum means that you don’t have to try to figure out the best time to make periodic investments. You can set up your portfolio and let it grow.
  • A 2021 Northwestern Mutual Life study showed that investing a lump sum generally outperforms dollar-cost averaging over various periods of time. Just keep in mind that this is based on past historical performance, so it doesn’t necessarily mean this will remain the case in the future.
  • Depending on what you’re investing in, a lump sum could reduce the overall commissions you might incur compared to making smaller periodic investments.

Cons

  • In order to make a lump-sum investment you need to have a lump sum to invest. If you receive a lump sum or have accumulated a large sum to invest, that’s great. Otherwise, you will have to raise the money from selling existing assets or another way. This process might negate the benefits of making a lump-sum investment.
  • A lump-sum investment is made at a point in time. The price you pay for the investment(s) may be high or low. If you invest when prices are high, you run the risk of incurring a loss if you need to sell in the near term.

Lump-sum investing vs. dollar-cost averaging

Whether in a retirement plan or otherwise, dollar-cost averaging is a good way to avoid timing the market, that is, trying to buy when the price looks especially attractive. Dollar-cost averaging is the practice of putting a fixed amount of money into an investment on a regular basis, typically monthly or even bi-weekly.

Making a lump-sum investment is about timing the market whether or not this is your intention. In contrast, dollar-cost averaging is about hedging your bets in terms of timing. Your performance may or may not lag a lump-sum investment, but it may well be less stressful than worrying about whether you made a lump-sum investment at the right time.

An excellent example of dollar-cost averaging is investing via an employer-sponsored retirement plan such as a 401(k). You would contribute a set amount to the plan each pay period. This amount would be invested in the plan based on your investment selections. For investors with a longer time horizon this type of investing can build a nice nest egg over time through the “miracle of compounding.”

One of the things possibly in favor of a lump-sum investment is that keeping some cash off to the side in a money market or high-yield savings account may deliver a minimal return. If current interest rates on low-risk cash accounts are close to zero, then your opportunity cost is low. If rates are higher, however, then investing a lump sum may be less attractive since you could otherwise earn cash on your uninvested balance.

A lump-sum investment in one or more securities doesn’t mean that you have to leave that money invested in the same way forever. You may need to rebalance your investments over time to keep them in line with your target allocations. Rebalancing is a solid investing principle and the money invested as a lump sum should be part of this rebalancing process. Stocks, mutual funds or ETFs purchased as part of a lump sum can and should be traded for other securities, if warranted, over time.

Lump-sum investing and dollar-cost averaging are not mutually exclusive

It’s common for an investor to have the opportunity to invest via dollar-cost averaging and a lump sum over their lifetime. Different situations arise at different times.

For example, you might be diligently contributing to your company’s 401(k) plan on a regular basis. But then you receive a lump sum and decide to invest that money as a lump sum. This is a good opportunity to rebalance your overall portfolio, if needed. You can direct new money from the lump sum to asset classes that might be underweight, without having to sell a large position and potentially realizing a capital gain.

If you have a concentrated position in a stock, perhaps due to receiving stock-based compensation from your employer, the lump sum can be used to invest in other types of investments to offset the impact of the concentrated position.

Bottom line

It’s easy to get caught up in an issue such as whether investing in a lump sum or gradually using dollar-cost averaging is better. In some cases, the option(s) available to you may be dictated by your financial situation and cash flow.

Whether you invest a lump sum, dollar-cost average, or a combination of both, it’s important to invest in line with your financial plan and your risk tolerance.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

Pros And Cons of Lump-Sum Investing | Bankrate (2024)

FAQs

What are the pros of lump-sum investing? ›

Investing a lump sum means that you don't have to try to figure out the best time to make periodic investments. You can set up your portfolio and let it grow. A 2021 Northwestern Mutual Life study showed that investing a lump sum generally outperforms dollar-cost averaging over various periods of time.

What are the disadvantages of lump-sum investing? ›

A lump-sum investment is made at a point in time. The price you pay for the investment(s) may be high or low. If you invest when prices are high, you run the risk of incurring a loss if you need to sell in the near term.

What are the pros and cons of investing? ›

Bottom Line. Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.

Is a lump-sum investment good or bad? ›

Some of the advantages of lumpsum investment over SIP include: Higher returns: A lumpsum investment offers higher returns over the long term. This is because the entire amount is invested upfront, and the investor can take advantage of the market's fluctuations.

What are the advantages and disadvantages of lump sum? ›

While lump sum contracts benefit from simplicity, they also present risks to both owners and contractors. Contractors may be incentivized to cut corners to stay under budget. May be on the hook for added costs due to change orders. Inaccurate estimating could cut into profit margin.

What are the advantages and disadvantages of lump sum method? ›

Advantages for owners include simplified accounting and little financial risk, and disadvantages include rigidity in project scope and a need to have every detail planned before beginning the project.

What are the pros and cons of lump sum vs annuity? ›

The best choice for you depends on your circ*mstances. If you want flexibility and have plans to grow a large amount of cash, consider the lump sum. But if you prefer having more financial certainty in your later years, the annuity may be the best route.

What are the 3 disadvantages of active investment? ›

Active Investing Disadvantages

All those fees over decades of investing can kill returns. Active risk: Active managers are free to buy any investment they believe meets their criteria. Management risk: Fund managers are human, so they can make costly investing mistakes.

What are 3 advantages and 3 disadvantages of investing in mutual funds rather than stocks or bonds directly? ›

Some of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.

What are 5 cons of investing? ›

While there are some great reasons to invest in the stock market, there are also some downsides to consider before you get started.
  • Risk of Loss. There's no guarantee you'll earn a positive return in the stock market. ...
  • The Allure of Big Returns Can Be Tempting. ...
  • Gains Are Taxed. ...
  • It Can Be Hard to Cut Your Losses.
Aug 30, 2023

What are disadvantages of investment? ›

10 Disadvantages of Long-Term Investments
  • Liquidity Constraints. According to our methodology, people investing in long-term investments tend to face several liquidity constraints. ...
  • Opportunity Cost. ...
  • Limited Flexibility. ...
  • Emotional Stress. ...
  • Limited Diversification.
Nov 29, 2023

What is the biggest problem with investing? ›

Common investing mistakes include not doing enough research, reacting emotionally, not diversifying your portfolio, not having investment goals, not understanding your risk tolerance, only looking at short-term returns, and not paying attention to fees.

Is lump sum a good option? ›

In most cases, the lump-sum option is clearly the way to go. The main difference between a lump-sum and a monthly payment is that with a lump-sum option, you get to have control over how your money is invested and what happens to it once you're gone. If that's the case, then the lump-sum option is your best bet.

What is the smartest thing to do with a lump sum of money? ›

Build emergency savings

However you choose to invest your lump sum, it may also be a good idea to build an emergency savings pot. Typically, an emergency savings pot should cover about three months' salary and be quickly accessible so that you can use it whenever you need it.

Is it better to put lump sum or monthly? ›

In a consistently rising market, investing a lump sum will give you the best returns, as it has longer to grow. But real life doesn't work like that. Even in a strong economy, the market fluctuates daily. Monthly investors are better placed to smooth out this volatility.

Why do people choose lump sum? ›

The lump sum provides a significant amount of immediate cash. Many opt for this option to avoid long-term tax implications. Annuity payments offer tax benefits and can prevent overspending lottery winnings. They provide guaranteed income, and can lead to more money in the long run.

What are the benefits of a lump sum vs annuity? ›

Cash in hand can feel good, and you can potentially generate extra returns by investing your lump sum—assuming you can manage the risk. Annuity payments, on the other hand, are guaranteed for life, assuming the provider remains solvent.

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