Portfolio management

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13. Lump sum or drip feed?

When starting for the first time, should you invest all your money at once, or drip feed it into your portfolio? Opinions vary.

One recent study of the period since 1982 shows that anyone investing a lump sum in one go would have done better up till now than someone making regular staged payments. The reason is that the capital would have had longer to grow.

Others argue such a strategy is too dangerous. Of course, they object, it seems to work if you look at a bull market like the one since 1982. But at certain other times it would have been a disaster. Had you put all your money into the market on the eve of the Crash of '29, you would have had to wait until 1958 to break even, after taking inflation into account! For most people, that represents a lifetime of investing.

But it has also been calculated that, if you had kept on investing equal amounts in each of those 30 years, you would have made a compound annual gain of 13%. This is the strategy known as 'pound-cost averaging'. By putting fixed amounts into shares on a regular basis, you will sometimes buy them when they are cheap, sometimes when they are dear. Overall, your costs will average out.

Pound-cost averaging is an automatic way of ensuring you do not overpay. This is demonstrated by the 13% annual gain you would have made following this strategy in 1929-1958, as against 0% using the lump sum approach.

But the most sensible course of action obviously lies between these two extremes. There is no reason why you cannot have the best of both worlds by following these guidelines:

• You should consider investing if, and only if, you can find good homes for your money
• If you can find plenty of them, you may consider investing up to 100% of your cash right away
• If you are having trouble finding value, you may consider investing no more than 50% of your cash
• If there are few good deals around, the whole market may well be overvalued. Wait for value to reappear before buying more, i.e. hold out for better deals
• Never stop contributing whatever cash you can spare to your portfolio. This may help to even out peaks and troughs in performance. It may also build up reserves ready for any new opportunities that arise.

1. First things first 2. Should you invest before paying off your mortgage? 3. Do you want growth or income? 4. Diversification: summary 5. Diversification: Safe custody 6. Diversification: asset allocation 7. Diversification: shares 8. Diversification: sectors 9. Diversification: countries 10. Balancing your portfolio 11. What should you hold where? 12. Tips for married couples 13. Lump sum or drip feed? 14. The role of cash 15. Rebalancing your portfolio 16. What to do with dividends 17. All about bonds 18. What to do if you inherit a portfolio 19. Benchmarking performance 20. Setting up a portfolio spreadsheet 21. Conclusion

• One Up on Wall Street