I've Got a Lump Sum in Cash. Should I Invest It Right Away?

What do you do if you’ve just received a big bonus at work, inherited some money, sold a business, or otherwise enjoyed a recent windfall you’d like to invest? Should you invest the money right away—even if the market seems particularly high or low—or gradually over time? 

This is a question we often hear from clients and other investors. Deciding how to invest a lump sum of money can feel paralyzing. What if you put the money in, and the market promptly declines? Or what if you hesitate and the market soars? It’s perfectly normal to worry that you’ll make the wrong move…or at least not the best one.

Investing a lump sum all at once or over time has advantages and disadvantages. Let’s look at some of the factors to consider.

Begin with Your Goals

Before making any investment moves, consider what you want to use your money for.

The market can be volatile in the short term, with the potential for big ups and downs. If some or all of your money is going to be used for short-term goals—say, paying college tuition bills that are just a few years away—you may consider more conservative investments less affected by this volatility, like short-term bonds, bond funds, or certificates of deposit (CDs).

If you want that money to help you pursue long-term goals such as retirement, then immediately investing in the stock market is likely worthwhile. Over the long term, volatility tends to smooth out, and the markets have historically continued to move higher.

Compare Lump-Sum Investing vs. Dollar-Cost Averaging

When you invest a lump sum, all your money is immediately exposed to the market. If the market is upward, you can take advantage of immediate gains.

But of course, near-term market returns are not predictable. There could be a downturn after you invest your lump sum. If this potential for a setback bothers you, dollar-cost averaging—investing a set amount of money at regular intervals—may be a more comfortable strategy.

For example, you could use dollar-cost averaging to invest $120,000 in a low-cost, total market index fund in $10,000 monthly installments over a year. That way, when the market is at a high, your investment buys fewer fund shares. And when the market is lower, your investment buys more shares. The strategy helps you take advantage of the market’s natural ups and downs, helping you manage the average cost of the shares you buy. 

However, be aware that the greater comfort of pacing your investments through dollar-cost averaging may come at a price. Research shows that lump-sum investing outperforms dollar-cost, averaging 68% of the time.

So, ask yourself: Is maximizing expected returns your top priority? If so, the lump-sum approach might make the most sense for you. On the other hand, the same research suggests the expected outperformance is not by a large margin. So, suppose the specter of potential investment losses might keep you awake at night. In that case, it may be worth taking a minor hit to use dollar-cost averaging, especially if it will reduce the chance of panic-induced selling that effectively locks in even greater losses.

Whatever You Do, Don’t Delay

Historically, stocks and bonds outperform cash holdings over the long term. To take advantage of this outperformance, it’s critical to start investing as soon as possible.

Delaying putting cash in the market is a form of market timing—buying or selling shares in an attempt to predict future market movements. This is a complicated game you’re unlikely to win. Consider that average equity fund investor returns trailed the market (as proxied by the S&P 500) by 5.5% in 2023, mainly due to trying to time to the market. Both lump-sum investing and dollar-cost averaging help you avoid this behavior and take advantage of the tendency for the market to grow over the long term. And this is what you need to meet your long-term financial goals. Choosing the strategy that will allow you to stick to your long-term plan is important.

Are you unsure how to invest some of your cash holdings? Contact us. We’d be happy to discuss which option best suits your needs.

If you want to discuss this or anything else that is on your mind, we offer a complimentary 15-minute call to discuss your concerns and share how we can help.

Stordahl Capital Management, Inc is a Registered Investment Adviser. This commentary is solely for informational purposes and reflects the personal opinions, viewpoints, and analyses of Stordahl Capital Management, Inc. and should not be regarded as a description of advisory services or performance returns of any SCM Clients. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Advisory services are only offered to clients or prospective clients where Stordahl Capital Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Stordahl Capital Management unless a client service agreement is in place. Stordahl Capital Management, Inc provides links for your convenience to websites produced by other providers or industry-related material. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third-party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third-party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax, or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

Stordahl Capital Management, Inc is a Registered Investment Adviser. This presentation is solely for informational purposes and not a solicitation to invest. Advisory services are only offered to clients or prospective clients where Stordahl Capital Management, Inc and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Stordahl Capital Management, Inc unless a client service agreement is in place. Please contact a financial advisory professional before making any investment.