Lump Sum Against Averaging In

Scope. This article sets out what each approach does to the expected outcome and to the spread of outcomes. It recommends neither and tells no reader what to do with any sum of money. The figures are simulations on the portal's canonical illustrative parameters and are not forecasts. Tax treatment can matter materially here and is parked to Annex A.

The reason the dispute persists is that the two approaches are better on different measures, and the people arguing are quietly optimising different things.

The arithmetic, before any simulation

Money waiting to be invested is not invested. If equities are expected to return more than cash, every day a tranche sits uninvested costs the difference in expectation — which on the portal's canonical parameters is the 5.0% equity risk premium.

Spreading a sum equally over twelve monthly instalments leaves the average dollar uninvested for 11/24 of a year — 0.458 years. Multiplied by the 5.0% premium, the expected cost of phasing in over a year is about 2.29% of the amount. That figure requires no simulation; it follows from the schedule.

The simulation

Investing $10,000 either at once or in twelve equal monthly instalments, with uninvested cash earning the risk-free rate, on canonical parameters of 9.0% expected return and 16.0% volatility, measured at the end of the twelve-month phase-in. 200,000 simulated paths.

What each side is optimising

The case for investing at once is that expected return is what compounds, the cost of waiting is certain while the benefit is not, and phasing in is a partial market-timing decision — an implicit view that prices will be lower later, held by someone who would deny holding a view.

The case for instalments is that the dispersion of outcomes is narrower, and that a worst case which is less bad is worth paying for. It is also a claim about behaviour rather than arithmetic: an investor who would abandon a position after an immediate sharp fall may do better with an approach they can stay with, and the return of a strategy that is abandoned is not the return of the strategy.

The distinction that resolves the argument without settling it. The question of which approach has the higher expected value is factual, and the answer is investing at once. The question of whether a narrower spread of outcomes is worth 2.29% of expected value is a preference, and preferences are not established by evidence. A reader who wants this portal to say which to choose is asking it to supply a risk preference on their behalf, which it declines to do — not out of caution, but because the choice genuinely depends on something only the reader knows. Two further considerations sit outside the arithmetic entirely: tax treatment, which is parked to Annex A, and whether the money is needed for something, which is a question about circumstances rather than markets and belongs to Pillar 31.

Three things the simulation assumes

That expected returns are positive. The advantage of investing sooner exists because equities are assumed to return more than cash. Change that assumption and the conclusion changes with it.

That the parameters are the right ones. The 9.0% return and 16.0% volatility are the portal's canonical teaching values, not a forecast of anything. A different volatility changes the dispersion figures substantially, though not the direction of either result.

That the investor follows through. Both approaches assume the plan is completed. An instalment plan abandoned halfway is neither of the two things measured here, and abandonment is likeliest precisely when markets have fallen — which is when the remaining instalments would have mattered most.