When market is at an all-time high, how should a lump sum be invested? One-shot or gradually?

A few days ago, I had presented backtest results for investing a lump sum in one-shot into an equity mutual fund vs gradually. I had shown that those looking to reduce investment risk or looking for better returns via gradual investing will be disappointed as there was no clear trend as to which is better. In this post, I consider a sub-topic as suggested by Pradeep: When markets are at an all-time high, will there be any observable difference between lump sum and gradual investing?

Again, please note that, if you wish to invest a lump sum gradually because you are scared, then this post is not for you. This post is only for those who claim that gradually investing will lower investment risk and/or enhance returns.

So this is Pradeep’s exact comment: Sir, It’s a meaningful article. We see lump sums did well sometimes and gradual investing did well sometimes and no difference so many times. But one other perspective is, among those 467 data points, how many of those represented all-time highs (which is where we are today) and lump sum vs gradual for those points how did they perform? Similarly how many all-time lows, and how did they perform? Also from all-time highs, how many % of times markets went down and how many times it went up. This will give an idea of what is the risk at any all-time highs. Just another perspective applicable for today.

Now, I have taken the results from the previous study (please read this first): Investing a lump sum in one-shot vs gradually (STP) in an equity mutual fund (backtest results) and considered only all-time highs for the one-shot vs gradual investing comparison.

So the red dots represent all-time highs.  The Sensex is shown here in log scale. To understand its benefit see: Are you ready to climb the Sensex Staircase?! Thankfully there is only one all-time low – the first couple of data points. So let us not worry about that.

The above graph also visually answers the second part of Pradeep’s comment: Most all-time highs are followed by further all-time highs. So to assume that the market will crash just because there is an all-time high is plain childish.

So now we compare one-shot investing vs gradual investing (over a few months) for different durations for investments made only during all-time highs.  I have already shown in the previous study that there is no change in investment risk irrespective of when we invest and how we invest. So I will only show the XIRR(annualized returns) comparison results here.

Ten year investment period: one- shot vs 6 months gradual investment

The horizontal axis represents trial no.  The gaps imply no investments were made between market-highs. So now, let us plot the return difference between lump sum and gradual investment.

When the return difference is positive (above black horizontal line), one-shot (lump sum) gave better returns. So all points below the black line correspond to when gradual investing was better. It is obvious that there is no clear pattern.

Ten year investment period: one- shot vs 12 months gradual investment

Ten year investment period: one- shot vs 15 months gradual investment

Five year investment period: one- shot vs 6 months gradual investment

Five year investment period: one- shot vs 12 months gradual investment

Summary

If the market is at an all-time high and if you have a lump sum, then invest it over a few months and be done with it. This is for your peace of mind. There is no evidence to suggest that gradual investing is better than one-shot investing at all-time highs or at any other time. Please do not assume what appears as common sense to you, will find quantitative support.

Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media


Do check out my books


You Can Be Rich Too with Goal-Based InvestingYou can be rich too with goal based investing

My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create customg solutions for your lifestye!Get it now.  It is also available in Kindle format.

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want My second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a youngearner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Create a "from start to finish" financial plan with this free robo advisory software template


Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

4 thoughts on “When market is at an all-time high, how should a lump sum be invested? One-shot or gradually?

  1. Dear sir,
    Thank you for this informative article. This questions the logic and paradigm that are often unquestioned. I have just one doubt. Often, when all time high is climbed, PE is not very low. Then new all time highs may occur either with a reasonable PE (say 25). If all these data points are separated by the PE, will the inference be different?
    Thank you for your insightful articles

    1. The market need not correct just because the PE is high. And in any case it does not correct sharply. What matters here is the not the PE value at the time of investing but what happens latter. Since that anyway is unknown, the results should not be different. In any case all all-time highs are explored here

  2. Spread it over 3 years or 5 years and you’ll start seeing why gradual investment reduces risk. Also it isn’t just about being better or worse than lump sum. Those investing at all-time highs are more worried about negative returns. So, comparing returns with similar investment in 10 year g-sec fund is more apt.

    1. spreading a lump sum over 3 to 5Y! Now that is practical! Let us do that to prove that risk is lower!

Comments are closed.