Tip of the Week: Lump Sum Investment Strategies (1/18/99)

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	Lump-sum investment strategies Financial Tip of the Week by Deloitte & Touche OnLine January 18, 1999

Invest it all at once, or a little at a time?

Wondering how to invest that beefy year-end bonus? You might consider ignoring the conventional wisdom.

While experts have long preached dollar-cost averaging -- the practice of gradually investing a constant amount in stocks -- as the best way to smooth out market peaks and valleys, a recent study suggests it may not be the most rewarding way to invest. Dollar cost averaging works well for people who invest regularly out of their current income, suggests a study by the Denver-based Institute of Certified Financial Planners, but it may not be the best approach for investors seeking to sock away inheritance money, retirement distributions or other lump sums.

The ICFP put accepted practice to the test when it invested a theoretical lump s um in 90-day Treasury bills and gradually moved it into the S&P 500 stock index over the course of a year. The return was compared to the return earned from investing the entire sum in the S&P 500 at the beginning of the year. The institute repeated this test for every year between 1926 and 1991.

The result: The lump-sum investment significantly outperformed the dollar-cost-average investment almost two out of three times. The ICFP asserts that's because the market generally rises over time. Consequently, there's an opportunity cost associated with holding uninvested dollars in a risk-free asset like T-bills.

This ignores, however, the market's current above-average volatility, which increases the chance an investor will simply pick the wrong day to invest. Timing the market is futile, but investing over too long a period isn't wise either, said Chris Parsons, Deloitte & Touche's national director for investment advisory services. He suggests investing a lump sum in installments over a short span of time, three to six months. "Pick a strategy that is consistent with your tolereance for risk and stick to it, no matter what the market does on a day to day basis," he said.