Incremental or Lump Sum Investment?You'll need to decide whether to make an initial lump sum investment or invest incrementally over a period of time by dollar-cost-averaging. This becomes more of an issue if you have a considerable sum to invest, such as an inheritance. If you have funds from a 401k or other tax-deferred account to reinvest, you should reinvest it immediately and the best way to do that is by transferring it directly to an IRA rather than temporarily taking possession of it. Always discuss 401k and other tax-deferred distributions with your accountant, financial planner or attorney before they occur. You'll find there are good arguments for both lump sum investments and dollar-cost-averaging. However, this is a decision you'll have to make on your own or with your financial planner, investment advisor and/or other qualified professionals, but I can provide some relevant information for you to consider. Studies show that an immediate lump sum works best most of the time. The reason for this is that, long-term, the movement of securities prices is biased upward. In other words, securities prices go up and down but they go up more than they go down, otherwise there would be no expected gain from investing. However, it's entirely possible to pick a really bad time to make a lump sum investment. If the market has been on a tear for a few years, making a lump sum investment might not be the best strategy, although if you've selected a very broad universe this won't as big of a concern compared to being narrowly diversified. On the other hand, if there's just been a major correction, it might be a good strategy, but there's always the possibility that the correction ushered in a recession and the beginning of a protracted bear market. Again, broad diversification tempers this risk. Those who advocate spreading your investment out over six to twelve months are taking a cautious approach in spite of the studies suggesting that the immediate lump sum investment is your best bet. They don't want to find themselves in the position of having to explain to you why it didn't work, and I can't say that I blame them. It's good to err on the side of caution when someone else's money is at risk, unless you've been given specific direction otherwise. Either way, don't wait until you think the market is right to start investing. Case in point: When Warren Buffett was just starting out on his own in the early 1950s, he asked his mentor, Benjamin Graham, if he thought it was a good time to invest. Graham told him the market was too high and he should wait until it settled back down to X. Well, Buffett went ahead and invested anyway and it was a good thing he did. If he hadn't, he'd still be waiting, as the market never did settle back down to X. Investing is ridden with risks and the need to make decisions. Your acceptance of risk and the making of decisions should always be done from a well-informed position. As I stated above, this is a decision you'll have to make on your own or with your financial planner or investment advisor. Either way, do some research on the Internet before making your decision to ensure that you are indeed well-informed. I can't advise you on this decision but I can tell you that being very broadly diversified minimizes the risk of making your initial investment, be it a lump sum investment or an incremental investment.
Return to the Your Mutual Fund Portfolio summary page. Move on to the next subsection, Buying Mutual Funds for Your Portfolio.
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