I think the big thing to understand is that I've already shared that lump sum investing wins. However, you do worry about what if you have once-in-a-lifetime money coming your way through an inheritance, selling some land, or selling a business. This is a big chunk of money that came my way, so that weight of the money should change my decision matrix. It's not like when you are just funding a Roth IRA or something. You're trying to figure out if this is dollar-cost averaging or lump sum investing. Usually, it's probably going to be okay to default to lump sum. But for bigger material decisions, you should potentially spread this out. We've actually come up with some rules with percentages to help guide you in making the best decision. Let me lay that out for you.
Yeah, so here's the rule, and it's fairly simple. What you want to do is think about your total investment portfolio. One of the things you ought to be doing is an annual net worth statement
, so you actually know the size of your current investable assets. Then, as you have a windfall come in, how big that windfall is relative to your invested assets should dictate how long you should dollar-cost average.
So, at the very baseline, if the money you're going to invest is less than 10 percent of your investable assets, then you should really consider lump sum investing. I think it's okay to put that money to work. However, if it's greater than 10 percent, then you should probably start some sort of dollar-cost averaging strategy. Thinking about the optimal strategy and where that lives, in our experience, we would say that if it's ten percent, you should dollar-cost average over the course of five months.
Yeah, so then what you want to do is for every five percent more that the sum represents of your total investable portfolio, you want to add an additional month until you get to a maximum dollar-cost averaging period of 12 months. What this does is take away the guesswork, the uncertainty around how to approach this, how to put this money to work. If you receive a million-dollar inheritance on top of your existing million dollars invested, there is nothing wrong with dollar-cost averaging that into the portfolio over the next 12 months. On the other hand, if you have a million dollars but you get a ten thousand dollar inheritance, there's nothing wrong with lump summing. Hopefully, this money guide rule will help you figure out the right strategy based on your circumstances.
What I love is that it solves the goldilocks problem. Very often, you get questions where you're trying to determine if it's too hot or too cold, what's just right. That's why we've tried to address it. We give you the metrics of what's big enough to have a long-term impact. It also answers the question of how long. We've taken out the guesswork on this by considering the size of the investment opportunity compared to your investable assets. Furthermore, we've provided a metric that ties into that. This should give you the guidance to maximize the opportunity without going too far out, ensuring that your money is working as hard as you do.
Okay, a word of caution or just something worth mentioning: don't overthink this. Don't allow yourself to get into analysis paralysis while trying to make this decision. I can't tell you how many times we've spoken with potential clients who said, "Yeah, you know, I made the mistake of getting nervous during COVID and I went to cash. I've been trying to figure out the best time to get back in, but I haven't done it" or, "2022 was a really bad year, and I have some money that I want to invest, but I just don't know when" analysis paralysis, they prevent them from making a decision.
One thing you've probably noticed is that in every one of these scenarios, as you've already said, in every one of these scenarios, whether it's dollar-cost averaging or lump sum investing, or whether it's dollar-cost averaging over too long of a time period, all of them have the common thread of people recognizing that they could put their money to work. Time in the market matters exponentially more than timing the market. So, do what you need to do to make the decision to move in the right direction.
I also love, Bo, that we've educated people. This is an important concept to understand, and many people are choosing sides. But I think this shows that it's not an either-or situation. It's about understanding how this valuable tool is used. Now that you have this knowledge, think about this: Vanguard has been doing this study. This is probably the third time I've read one of their research reports. They update it every few years. When Daniel brought this to my attention, I said, "Hey, is the spread still two percent?" He said, "I don't know, let me go check." Sure enough, he went and read the research report and found that the difference in performance between dollar-cost averaging and lump sum from 1976 to 2022 was about 2.2 percent in favor of lump sum.
This is why you need to know this. Whenever you find out someone is leaning towards a particular camp, you can say, "Guys, let's not split hairs here. Let's remember that this is a situation where you need to understand the variables, process them, and find the most efficient way to maximize the opportunity." That's why the Money Guy rule on how to find your own personal goldilocks situation regarding the strategies of lump sum versus dollar-cost averaging. We've laid it all out, and now you can go conquer that. For more information check out moneyguy.com/resources