Periodic Versus Lump Sum Investing: The Importance of Timing

It’s time once again to discuss the importance of timing when it comes to investing. Timing plays a role in investing success whether we like it or not, and it affects investing strategies. Because of that, your investing strategy may need to change depending on whether you’ve got a lump sum of money to invest or whether you intend to invest on a periodic basis.

You hear a lot of commentary about how just a little bit of money invested in stock markets can make big gains years later. Probably the most famous recent example of that was Warren Buffet’s statement about the growth of American industry, and how just $10,000 invested in an index fund in 1942 would have been worth $51 million today. Of course, nobody had $10,000 to invest back then in the middle of World War II.

According to the CPI calculator, $10,000 in 1942 would be the equivalent of $160,000 today. And if you calculate that according to gold, that would have been over 285 ounces of gold, or the equivalent of nearly $350,000 today. Those aren’t sums that most investors have to play around with, so let’s look at some actual investment scenarios that are a little more realistic.

The 1980s Stock Market Boom

Let’s imagine a worker who graduated college in 1985, went to work that summer, and started earning $15,000 per year, a little less than the national average. That worker put 5% of his gross salary into a 401(k) account every month, with the investment being made at the end of the last day of the month, or in the event that day was a holiday or weekend, at the end of the next business day. Let’s also assume that that worker received pay raises of $1,500 at the beginning of each year, and that the 401(k) was invested in assets that tracked the performance of the Dow Jones Industrial Average.

From July 1985 to June 1998, that worker would have put aside $16,087.50 from his paychecks. Over that period of time the Dow Jones went from around 1,350 points to nearly 9,000 points, an annualized growth rate of about 15.7%. But because of the fact that the investment was undertaken periodically rather than all at one time, the growth rate of the worker’s investments weren’t nearly that good. By June 1998 the worker would have had a little under $44,000 in his 401(k) account, meaning that his account would have averaged about 8% annualized growth per year versus just putting the money into a non-interest bearing account.

If that worker had had an employer match for his contributions, his account would have been worth just under $88,000 in 1998, or an annualized growth rate of about 14%. But if the worker had been somehow able to put the full $16,087.50 into a 401(k) in 1985, his account would have been worth nearly $107,000 in 1998 even without an employer match or any further contributions. The moral of the story is that the more you are able to invest early, the better off you will be in the future.

The Past Two Decades Haven’t Been Great for Investors

Unfortunately, that period of time was one of the best times for stock market growth that we’ve ever seen, and they’re not likely to be seen again for a long time. Stock markets doubled in some cases every 2-3 years, making it simple for many investors to make big gains. Investors today would kill for 16% annual growth. Since 1998 the Dow Jones has only grown at an annualized rate of about 5.2% per year, one-third of what it did during the 1980s and 1990s. That in turn has significantly reduced the ability of workers to save and invest for retirement.

Let’s imagine another scenario now, one in which we have a worker who graduated college in 1998 and started out that summer making $30,000 per year. He got annual raises of $2,000 per year over the next 20 years and is now making $70,000 per year. He also puts 5% of his gross salary into a 401(k) that tracks the Dow. Over the past 20 years he would have put aside $50,000 of his salary. But the Dow’s poor performance over the past two decades means that his account is now worth about $98,000, an annualized increase of only 3.4% compared to socking the money away in a bank.

It’s interesting to note that had the worker put that money into gold rather than stocks, he would have done almost as well, with a little less than $94,000 in gold today. But the interesting part about that is that gold actually outperformed stocks during that period. If you had invested a lump sum in July 1998, investing in the Dow would have gained 5.1% per year but investing in gold would have gained 7.6% per year. So for an investor looking to invest a lump sum, such as through a gold or precious metals IRA, gold would have been the better choice. But because of the timing of investments, someone investing a small sum at the end of the month would have done slightly better with stocks than with gold. That’s another one of the quirks of timing that most investors don’t know about or pay any attention to.

Now, you have may have read through these two scenarios and found them interesting but are still wondering how all of this applies to you. So here are the four primary takeaways.

1. Investing Sooner Pays Better Than Investing More Later

If you have the ability to invest more early on, take advantage of it. Gains will only increase over time, and the more you invest early on the better the position you’ll be in come retirement. If that worker who started investing in 1985 had never invested a single penny more in his 401(k) after 1998, he’d still have 23% more in his 401(k) today than the person who invested religiously every month from 1998 to the present, even with less than one-third of the total contributions. That’s the power of investment growth over time.

2. Investing a Lump Sum May Require a Different Investment Strategy Than Regular Contributions

If you’re investing a fixed sum, such as rolling over a 401(k) into a gold IRA, you would have been better off over the last 20 years by investing in gold, in fact nearly 60% better off. But if you had invested a small sum at the end of every month, you would have done slightly better by investing in stocks. How often you choose to invest can make a difference.

3. Your Investments May Not Match Historical or Average Returns

When you hear about stock markets gaining X% over the long term, or over a certain period of time, it’s not guaranteed that you’ll make anywhere close to those gains. Depending on when during the month you invest, your investments may buy in at higher prices and not reap nearly the gains that you could get by investing at another time. That may not be something you can help, but it’s at least something you should be aware of when deciding what you’re going to invest in and how you’re going to invest.

4. Stocks Have Been Outperformed by Gold in the Medium Term

This isn’t really a shocker to people who have invested in gold or followed gold markets for the past couple of decades, it’s more of a shock to people who continue to insist that stock markets are the best way to build up wealth. In many ways investment advice is still stuck in a pre-2000 mentality. The collapse of the dotcom bubble and the housing bubble set stock markets back years, yet most investment advice still encourages people to invest in stocks to build up wealth. But as we’ve seen over the past two decades, investors who followed that advice haven’t done nearly as well as those who protected their assets by investing in gold.