The following question is from Todd, who is in his early thirties and wonders how he should invest a lump sum amount:
I have a significant amount of money in an RRSP – $60K, but this is mostly in cash. Each pay cheque more money is being added (matched by employer). How would you go about putting this money to work? I’m hesitant to just put it all to work in a sleepy portfolio right now at what seems to be a point when the market has gone up already for years, should I average in over the next year? Or is the best thing to do is to invest it all right now? I’d be very interested in a blog post about how to boot up an investment plan when you have a fairly large amount saved in cash.
For now I’m changing the rules of the plan so that it invests new money into a sleepy portfolio. But what do I do with the existing cash?
Many studies have used historical data to figure out whether lump sum investing or dollar cost averaging would have made the most sense and concluded that, on average, you would have been better off investing immediately. The conclusion makes logical sense since markets go up more often than down and you pay an opportunity cost in looking for attractive entry points.
In investing though, emotions play a larger role than logic. You have the capacity to take risk – you have many decades to retirement and you have the staying power to recover from any temporary setbacks in a diversified portfolio. Still, investing a lump sum in the equities market makes sense only if you won’t panic and sell in a downturn in the equity markets. You may not even be able to estimate your risk tolerance correctly unless you have experienced stock market losses before. So, the answer really depends on what kind of investor you are. Ultimately, only you can answer that question.