Should you invest your money all at once or over time?

It makes a difference in the short term

Continuing the series of long-term investment profit probabilities, I wanted to look at the long-term impact of splitting an investment into a series of smaller investments. The result isn’t as impactful as investing near all-time highs but it is interesting either way:

I’ll start with the most noticeable impact, which is the probability of profit in the short term. On a historical basis, investing on one day means that your probability of having a positive return the next day is 52%. But, if you invest half now and half in six months, you have a much higher probability of being profitable the next day. This makes sense because on the first half of the investment you basically get a six-month lead on the market to go up. This increased probability is also noticeable a year and even two years out.

In the long run however, it doesn’t really matter. This means that if you have a big amount of money you want to invest then putting it all in tomorrow or over a series of intermittent periods won’t make much of an impact on your long-term profit chances. To be honest, after doing the calculations and seeing the results, the difference was actually smaller than I thought it would be.

All that being said, one big reason to not put your money in the market all at once is to avoid the pain of investing right before a drop. It’s hard psychologically to put everything in and then see a decline. It’s easy to be tempted in that situation to pull out, so as to avoid more losses and maybe buy lower. But, timing the stock market is basically impossible and very likely to end in regret. So, spacing out investments is a good approach.

In terms of increased frequency, if you look carefully, you’ll also see that I have monthly investments on the chart as well. But, that doesn’t really give a noticeable advantage over an investment that is split in half. I also did the analysis with daily investments - no one really has time to invest on a daily basis but it didn’t show much improvement, so no need to worry about it!

The bottom line is that it makes sense to invest regularly over time - I suggest monthly. It doesn’t improve your odds that much versus investing twice a year but a more regular investing period helps build a good financial habit that will improve investment success over time. It also helps avoid the psychological duress of investing a big chunk of money all at once.

So, create a plan, stick to it, don’t panic during drops, and keep a long-term mindset. Easier said than done.