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Asset Allocation

Does Investing all at Once makes sense?

It was nearly 10 years ago that I received a big Cheque thanks to selling off a asset that had suddenly appreciated in value much beyond what I had imagined. What I did with that was a kind of turning point (in a bad way) in my life. But this post is not about the stupidity I did, its about whether you can do better when you receive a big cheque that could really change your life.

Assume for instance you sold off a property and now have a sizeable sum of money. What should you do with it and how do you go investing the same?

Once you are in the 30% tax bracket, any investments should be seen in the light of how that post tax return compares to other options available.

Equity Investing is all the rage and if you are looking at wealth generation for the long term (or even for goals that don’t require money for a decade or more), its a good bet. But how should you proceed with the money you received?

Should you for instance just select a few funds (if you are into Mutual Funds) and invest it all or should you drip the money into the same funds over time.

Vanguard in 2015 did a study of whether it makes sense to invest all at once or invest over time (Assumption being that you have the full money available at the start). This was conducted across three markets – United States, Canada and Australia.

The conclusion;

Our analysis indicates that investing immediately has historically provided better portfolio returns on average than temporarily holding cash

The conclusion though isn’t conclusive since only 67% of time does lump sum out-perform sipping the same money over the next 12 months. In 33% of the time, it was better to invest over time rather than invest all at once.

So, how would such a idea fare in the Indian Markets?

For the test, I used Nifty 50 (Spot) data starting from 1990 to date. When money was invested over time, the assumption was this was held in Cash and did not yield any returns. But in reality, this could have been easily invested in funds such as Ultra Short Term Bond funds with monthly withdrawal to feed the equity.

Here are two charts to provide a birds eye view of which option is better.

The above charts plots multiple things. We plot the instances where SIP made sense. This is represented by drawing a Vertical Line – the colors denote the length of the SIP in Question. On the Secondary Axis we have the Sensex PE chart plotted.

The visual represents whether investing in one shot gave a better return than when invested over time (invested over 12 / 24 / 36 / 48 / 60 months). Blank are is when lump sum made absolute sense while lines were when SIP’s of a certain period made sense.

The above chart can also be synthesized in a data table which I present below.

How to read this Table?

The table beside this text represents the % of time lump sum investing beat investing over time. Longer the period of SIP, higher the probability of success using the lump sum mode.

 

While regardless of market conditions and valuation, investing all at once can make sense if you are looking for a investment period greater than 20 years, as the charts above showcase, looking at Valuations can be advantageous to your financial well being.

The Vanguard Study: Invest now or temporarily hold your cash? 

 

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