Investment Guide: Lump Sum Investment Or Drip Feed?
If you have figured out what you want to invest in, how long you want to invest for and how much you can afford to invest, then you also need to decide on whether to invest all your savings in one go or to add funds over a longer period of time.
How you time feed your investment could have a significant impact on the returns you receive. This is an important decision, and should not be made solely based on how much money you have at the moment.
Here are the pros and cons of each method to consider before you make that decision:
Drip feeding your investment
1. Affordability of investment
Most beginners think they need to have a big lump sum of money to kick-start their investment. This is not true. Some investments allow you to start small. You can choose from a wide array of investment vehicles with just RM1,000.
If you don’t have enough put aside for investment, you might prefer to drip feed your money on a regular basis.
2. Lower risk
Every investment comes with a risk. Therefore, investors are advised to do as much research as possible, before investing. One way to mitigate the risk due to the volatility of investment, especially in stock market, is by investing small, regular amounts.
This is called pound cost averaging. The effect of pound cost averaging is that you’re buying assets at different prices on a regular basis, rather than buying at just one price.
This will smoothen out the highs and lows of the market. You could end up better off than if you invested with a lump sum.
For example, if A invested RM10,000 lump sum at RM10 per unit, he would have 1,000 units of shares. But B, who invested RM500 every month over 18 months, amounting to RM10,000 in investment as well, could end up with more shares at the end of the day.
Even though B would only have 50 units in the first month, due to the possibility of share price dropping, B would be able to buy more than 50 units when the price is low with the same amount of investment (RM500). Therefore, overall, A would maintain his 1,000 units, but B may have bought more shares at the end of the day.
Lump sum investment
1. More investment options
Most people would choose investing in lump sum as the result can be immediately seen. However, this is usually for investors who have a larger investment fund on hand and also the confidence in the particular investment performing well.
Lump sum investment can be done with the year-end bonus, or other sudden windfall. A larger fund opens up a wider array of investments, especially those with higher minimum investment amount.
2. Potentially higher return
By investing a lump sum, your investment is immediately exposed to the market and has the greatest potential for growth, but it will also have the greatest potential for loss should the market fall.
Lump sum investing can be more rewarding in the long run compared to regular small contributions. Investors who try to time the market would definitely strike in lump sum when they believe the time is right. However, this is extremely difficult to forecast, even for the seasoned investors.
To avoid exposing their investment to further risks, these investors would practice “investing on the dips” where they set a limit for themselves – only investing in a lump sum when the market has fallen by a certain percentage.
Lump sum versus drip feed
Here’s an example highlighting how both methods of investment can affect your return, based on the term of investment.
Choosing the best way to invest really depend on your individuals. If you are confident in a particular fund or stock, then investing in lump sum may sound like a good idea. This is what investors usually do if they are looking to invest long term, can stomach volatility and have the money available, due to the potentially bigger gains. However, regular saving is can also help investors to protect their capital during short-term bouts of volatility.
To diversify the risk further, most investors would adopt both methods of investment. By splitting your money between a full investment and regular contributions depending on the type of investment.