If you’re approaching retirement, or even in retirement, you will have some money decisions around large lump sums. When you sell a business, take control over your pension or group RRSP, downsize your home, or even inherit assets, you have choices to make.
One of the most fundamental decisions for investing lump sums is figuring out “when” to convert that cash into investments. Is there a “best” day to get into the market? Can you time out the right moment to deposit proceeds into your retirement portfolio?
Can I Time the Market?
The short answer is “no.” The long answer is “almost certainly no.” Look at historical returns over any given year and you’ll see predicting outcomes is downright impossible. Narrowing that window to a particular month, week or day is even harder still. At best, your odds of buying on a “good market day” vs. a “bad market day” are near 50/50. Do you want to start your entire retirement nest egg off on a coin flip?
When Should I Invest?
When it comes to investing large lump sums, a good process is key to mitigating market risk. If you know that investing on one particular day is equivalent to a coin flip, heads you win and tails you lose, do you take that gamble? Or would you rather tilt the odds in your favour by, say, taking more turns?
Instead of only one try to get it right, what if you split the funds into smaller chunks and take 5, 10, or even 20 tries? Sure you’re likely to get “tails” on some of those days, but you’re also offsetting by getting “heads” on the others. This is the fundamental nature behind the investing strategy of dollar-cost averaging. Hedge yourself against market timing risk by systematically moving out of cash over time.
How Do I Implement Dollar-Cost Averaging?
Dollar-cost averaging is very simple to implement. Most investors have been doing so without knowing it their entire working careers. When saving monthly or bi-weekly into your RRSP, work pension, or any other account, you’re using dollar-cost averaging. Most people just don’t think to apply the same principles to lump sums. Instead preferring to get it out of their hands as quickly as possible so the cash doesn’t burn a hole in their wallets!
You can work out a dollar-cost averaging plan with your Investment Advisor by apportioning out your lump sum into equal installments, rolling cash into your portfolio on pre-determined dates. For example, you may split $100,000 into 10 equal deposits of $10,000, scheduled to invest on the 15th of each month. This calculated approach will get all of your funds invested over time, without the stress or risk that you timed the market poorly with the entire amount.
Navigating the nuances of lump sums can be tricky. Take the time to map out a systematic approach to investing those assets and you can rest easy that you’ve moved the odds in your favour! There are plenty of other considerations, like taxation, portfolio construction, and withdrawal strategy, but at least your initial deposit won’t be relying on a coin flip!
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