If you receive a lump-sum from an inheritance, perhaps, or from a property sale, should you invest all at once or should you invest gradually? If you invest your lump-sum just before a steep stock market drop, your holdings could quickly drop 20% or 30%. Some investors might bail out and miss the substantial long-term returns stocks historically have delivered.
Investing gradually is a way to reduce your risk. You might stretch out investing over 10 months, for example, committing 10% of your lump-sum each time. Then, if stocks drop by 20% after your initial investment, you’ll buy stocks at a much lower price the following month.
This type of gradual investing, known as dollar-cost averaging, has particular psychological appeal in volatile investment markets. That’s certainly what we face today. By tiptoeing into the market, you increase your chances of buying low, which will pay off if stocks perform as they have in the past.