Investing: All In?

The New York Times recently looked at a question that sounds complicated: if you have a choice between investing all your funds in the stock market at one time or doing so gradually, which option will make more money over the long run?

This kind of question comes up for investors. If you inherit a windfall, sell your business, or receive a nice severance package, you might have a lump sum you want to invest. In the thought experiment the Times set up, there’s no question about where you’re going to invest. They didn’t compare investing in art with investing in an annuity; they just assumed that their hypothetical investor was going to go with stocks.

Investors who know what they’re going to do with their money can very easily be uncertain about whether to make an immediate investment of the whole amount, though. Often, people feel like trying it out, making some small investments to see how they do, or keeping cash reserves and investing a certain amount every month.

The Times did the math and discovered that — for the stock market — going all in will always provide a better return than investing a little at a time.

This surprisingly simply answer is based on simple math.

Say you have $100 to invest and an investment earns you 3% over one year. You put in your $100 on January 1 and on the following January 1 you have $103.

If you put in $50 on January 1, you will have $51.50 on the following January 1. If you put another $50 in on June 1, you’ll have another $51.50 — but not till June 1 of the following year. The amount you held back will never catch up with the amount you invested to begin with.

It is of course possible to lose money rather than gain it. The math may be simple, but investing can be complex. Working with a financial planner is a good idea for anyone who is considering investments.