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.