Investors sometimes have a larger-than normal amount of money that is available for investments (this could be due to an annual bonus, an asset sale, inheritance or other such events). We are often asked the question on whether it is better to invest this money in one-shot as a lumpsum investment, or would it be better to stagger the investments over a period of time?
As with all matters related to investments, answers to questions are often more nuanced as compared to simplistic answers that are often given to investors.
Since equity markets are volatile, investors are often recommended to stagger their investments, since this allows them to average down the cost of their investments in case markets were to correct during the period of staggering. However, the flip side of this argument is also true – if markets were to continue to move up over the period of your staggering, this would lead to a higher average cost of your investments.
What does the past data indicate in terms of lumpsum vs staggering?
In order to better understand the pros & cons of lumpsum vs staggered investing, we have undertaken a study using the past 20 years of Sensex data, where we compare the average investment cost across this period of investing in a lumpsum versus investing in a 12-month staggered fashion.
- Additionally, in 75%+ of the months studied, lumpsum investing would have lead to a lower overall entry point as compared to investing in a staggered manner.
The results of this study can also be seen in the graph below, which shows on a month wise basis how much more expensive a staggered investment approach has been compared to a lumpsum investment.
- The subprime crisis was the best example, where a 12-month staggered investment approach would have lead to a 20% lower investment cost
- Apart from the sub-prime crisis, the only other periods where a staggered investment approach would have proven cheaper include 2012 (taper tantrum), 2016 (extended time correction), 2020 (covid). Interesting in each of these cases, a staggered approach would have only lead to an average cost what would be ~5% lower than that of a lumpsum approach
Often investors may be more concerned with protecting short-term downside, as compared to the fear of investing at slightly higher market levels. In these cases as well, staggering may be a better approach.
Another way of looking at it, is that if there appears to be chances of a large correction in the near-term it may be better to stagger your investments. However, if there is no forseeable risks to the markets in the shorter-term, a lumpsum investment may be the better approach.