Lump Sum Investing or Regular Investing?

When investments are contemplated, it is usually a lump sum of money that is suggested e.g. $ 1,000. Thus, investors save some money from their monthly income and when they have accumulated a sufficient amount, they may be looking at the alternative ways to invest that amount. Can a person invest in smaller amount regularly instead of a lump sum? What significant difference will it make? Are there many financial instruments that allow this? To find out the answer, let's look at some examples:

Illustration for lump sum investing:

To achieve an objective of $ 100,000 in 20 years time, you will need to invest $ 31,180.47 at the beginning of the year in an investment that yields an annual compound return of 6%.

Illustration for regular investing:

To achieve a objective of $ 100,000 in 20 years time, you will need to invest $ 2,564.58 at the beginning of the year every year in an  investment that yields an annual compound return of 6%.

The difference between the two is obvious. If I do not have a lump sum of $ 31,180.47 to invest now, I can still achieve the same objective of $ 100,000 in 20 years by investing regularly from my income, an amount of $ 2,564.58 p.a. This is the alternative that is more feasible. Investing in both methods have other implications, besides the frequency of input. What are they?

Financial Instruments

The financial instruments that are available for regular investments are insurance policies like endowments, investment linked plans, units trusts, bank savings account. The amounts invested regularly can be minimal. This allows the investor the opportunity to accumulate wealth and take advantage of the potential growth in the investment. Some others like real estate, individual stocks, currencies, derivatives may not be suitable as bigger lump sums may be necessary.

Volatility of Investments

The volatility of the investments must be considered when contemplating either method. Regular investing provides the opportunity to average out the ups and downs whereas timing takes on a more crucial dimension in the case of lump sum. Diversification is important in both methods, but comparatively, more so in the lump sum method. Unit trusts or investment linked plans are less volatile than individual stock investment. This variable is considered in the choice of methods.

Investor Behavior 

A factor in investments, that seems to be paid less attention, is the attitude and emotion the investor brings into the investments. Different people have different expectations and react differently as time goes by. Risk tolerance, often mentioned by investment advisors, is just one part of the investor's attitude. Expectations of the investment outcome during investing must be realistic and managed. Commitment on the part of the investor is also important, especially in the regular investing method. By being clear about objectives and expectations, investors tend to stick it out through the duration of the investment plan. Anticipating money needs will elevate the problem of liquidity and thus, avoid the plan.

Conclusion

Both concepts and methods are useful. A combination of both is an attractive alternative. Financial planning is required when deciding on which method to adopt.

The Financial Integral is published for clients of Strategic Financial Systems Pte Ltd, afinancial planning firm specializing in an integrated and strategic approach to financial planning. This publication is for information only and not a solicitation to purchase products. Correspondence to 160 Changi Road, #01-04 Singapore 419728.