Investing step by step?

When investing for the first time, or investing a significant portion of your wealth, it's natural to wonder how to do it. Should you execute everything at once or spread multiple purchases over time? Does it matter whether stocks are “expensive” or “cheap”? Let's look at what the evidence says.

In a study covering 1997 to 2020, for different types of investments (bonds and stocks in different markets), two strategies are compared: investing all the funds in a single transaction, or spreading it across 24 equal monthly purchases over 2 years. Depending on the type of investment, 60%-90% of the time the first approach yields a higher return—between 4% and 11%—after 24 months. Moreover, making multiple monthly purchases shows worse figures even when adjusting for risk; that is, while this strategy has lower volatility, the drop in return is proportionally greater than the reduction in risk. Finally, one might think this more conservative strategy makes sense when market valuations are at high levels. However, even when U.S. stock-market valuation multiples have been at their highs, the single-purchase strategy returns 5% more than staged execution over two years.

These results make quite a lot of sense. If assets—on average—have a positive return, waiting a long period to invest will carry a cost that can be impossible to make up.

That said, taking two years to invest is a fairly extreme case. There are also qualitative considerations for an implementation that gradually takes on more risk, so as to calibrate the most appropriate investment policy for each investor.

All in all, the saying remains relevant: “the best time to invest was yesterday, the second best is today”.

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‍This column was originally published in La Segunda [LINK] on 19–08–2021