Should you invest a lump sum or drip your money in over time?

If you have a pile of cash to invest, should you stick it in your stocks and shares ISA all in one go or drip-feed it in instalments?

It is a question some investors will be asking themselves now that a new tax year has begun, with a fresh £20,000 ISA allowance in place.

Analysis from investment firm Vanguard shows that lump-sum investing tends to beat a drip-feeding approach two-thirds of the time. However, drip-feeding can help mitigate short-term risk thanks to pound cost averaging.

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Pound cost averaging is when you invest fixed amounts at regular intervals, regardless of market conditions. It means you buy fewer units when prices are high and more when they are low.

The pattern of lump-sum investments outperforming holds particularly true when markets are on the way up, the investment platform said, with investors reaping the rewards of having been fully invested from the start.

Meanwhile, those who spread their investments out over a longer period miss out in environments like these, thanks to the opportunity cost associated with keeping cash on the side lines.

There is no one-size-fits-all approach, though, and pound cost averaging can take the emotion out of investing – something to consider now as market volatility continues. It can also result in a smoother investment journey in the short-term.

“Whether you decide to invest a lump sum, make regular contributions or combine the two approaches, the key is to stick to your plan, even when the market gets a bit bumpy,” said James Norton, head of retirement and investments at Vanguard Europe.

“In this context, it’s important to remember that stock market ups and downs are a natural part of investing. Although your investments could go down as well as up, history shows that, over long periods, shares rise in value and typically deliver better returns than cash.”

Lump-sum investing versus pound cost averaging

Vanguard’s analysis spans a range of regions, from the US to global and emerging markets. The investment platform looked at one-year rolling investment performance from 1979 to 2022. It also considered a range of investment splits, including splitting the lump sum into three, four, five and six instalments and investing each portion one month apart.

The “hit rates” detailed in the table show how often one strategy outperformed the other after a one-year investment period, expressed as a percentage.

^{Source: Vanguard. US data based on Russell 3000 Index, 1979–2022. UK data based on FTSE All-Share Index, 1986–2022. Canadian data based on S&P/TSX Composite Index, 1985–2022. European data based on MSCI Europe Index, 1998–2022. Australian data based on S&P/ASX 300, 1992–2022. Emerging market data based on MSCI Emerging Markets Index, 1988–2022. Global data based on MSCI World Index, 1976–2022.}

Investing in instalments still suits some investors

While lump sum investing generally beats drip-feeding your money over the long run, this approach doesn’t work for everyone.

We have already delved into the benefits of investing in instalments when it comes to smoothing short-term volatility (pound cost averaging), however there are also more practical considerations.

If you wanted to exhaust your ISA allowance in any given tax year, investing it in one lump sum would require you to have £20,000 kicking around at the start of each tax year. Not many people are in this position.

From a budgeting perspective, you might find it easier to split your ISA allowance into twelve monthly instalments of £1,666.66, or less.

Setting up a direct debit will mean there is no risk of you forgetting to make a monthly contribution. It will also take away the temptation to procrastinate and sit on the side lines when markets fall (usually a bad idea in the long run).

“Investing can get clouded by market noise, causing investors to second guess whether buying an asset at a certain point is the best decision, particularly when markets are topsy turvy,” said Alice Haine, personal finance analyst at investment platform Bestinvest.

“Investing on a regular basis, such as monthly, rather than timing a lump sum investment means an investor consistently invests regardless of whether markets are up or down – key when you consider how difficult it is to accurately predict short-term market movements.”