Fast or Slow?

MANY OF US GRADUALLY buy into the financial markets over the course of our career. Arguably, that’s ideal, both from an investment and an emotional perspective: We purchase stocks and bonds at all kinds of prices—some high, some low—and the fact that we have future dollars to invest means any market decline has a huge silver lining.

But every so often, we’ll have a larger sum that we want to invest in the stock market. It might be a year-end bonus, an inheritance, or perhaps the proceeds from selling a home or exercising employee stock options. Alternatively, we might have second thoughts about our current investment strategy and decide we should invest more aggressively, but we’re agonizing over how quickly to make the switch into stocks.

The conundrum: Should we invest the money all at once or spoon it into the stock market over, say, 12 or 24 months? Financial experts often argue that the optimal strategy is to invest the money right away, because—on average—that’ll generate the highest return. After all, the stock market tends to rise over time, so getting money invested earlier will usually result in greater wealth.

Problem is, we won’t get an average return—and investing a large amount right before a big stock market decline could prove financially devastating. What to do? We might ask ourselves two questions.

The first question: How significant is the sum involved compared to our current wealth—and compared to the money we’ll save in the years ahead? Investing $20,000 in the stock market all at once might seem like a huge risk. But the risk isn’t so huge if we already have a $200,000 portfolio or if we expect to save another $200,000 during our remaining time in the workforce.

The second question: Where are we in the stock market cycle? If the concern is investing a large chunk of money right before a big market decline, that risk is smaller if stocks are already well below their all-time highs. We might still choose to invest the money gradually. But instead of investing it over 12 or 24 months, we might put the money to work over three or six months.

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