What you are about to read is my story on how I invested a lump sum of money ($108,760 dollars and 2 cents!) in the stock market. I started this portfolio from scratch in September 2017. You can read my monthly update here. My goal is to share my story and tell you how I managed to invest in this crazy market. Waiting is not an option. Investing today is the best decision you will ever make.
The arrival of a Lump Sum of money would likely create mixed emotions. It could come from a former employer’s pension plan, an inheritance, the sale of a property or a business, or simply because you have been sitting on the market sideline for a while and you are now ready to invest. In any case, receiving an amount over $100,000 is quite exciting. You picture several projects and a world of possibilities open up. Unfortunately, the sudden arrival of a Lump Sum of money comes with it loads of concerns. Today, I’m going to answer a crucial question:
How to Invest a Lump Sum of Money?
Less than 30 days to invest $76,000
If you have been searching the web for a methodology on how to invest a large amount of money, you’ve probably read tons of articles about how people would do it. I always had a problem with people knowing stuff, but not doing them. When it comes down to investing money, there is a huge gap between theory and reality. All the would, could, should take a whole different meaning when you hold a check with several zeros in your hand.
In 2017, I quit my job and decided to manage the commuted value of my pension plan. I received a lump-sum payment of $108,760.02. This money was meant to be invested for my retirement. I invested the first $76,000 within a few weeks and completed my portfolio a few months later. The entire amount was invested in dividend growth stocks (50% Canadian, 50% U.S., no international companies).
At that time, 2017 represented the stock market all-time high for both Canadians and Americans. How do you invest a Lump Sum of money when the market is at its peak? I was well aware of what could possibly happen if I had picked the wrong year to invest. From peak to bottom, investors saw the stock market lost about 50% of its entire value during the 2008 financial crisis:
Source: Ycharts
Just the thought of losing $50,000+ within a few months is enough to keep you waiting for a very long time before making an investment decision. But is waiting really the solution? You’re just postponing the inevitable: invest the money. Since it was my decision to quit the corporate world, I knew this money was coming. Here’s what I did before I received the money.
3 Things to do before invest a large amount
First, planning is everything. Before you even get the money in your hand, you should consider what you want this money to do for you. Keep in mind that money is there to work for you and enable you to enjoy life, not the opposite. In my case, this lump sum amount needs to be invested for my retirement. The purpose of your money will determine how you will invest it (e.g. for the next 5 years or for the next 30 years). I determined I would invest this amount with a long-term investment horizon. If you don’t know if you should take the lump-sum payment or keep your former employer’s pension, I’ve designed a decision grid to help you.
Read: Pension Vs Lump Sum
Second, will you take care of your investment or hand it over to an advisor? Money is a very personal matter and nobody cares more about your portfolio than you. However, if you lack time, interest, or knowledge, having a professional-looking over your investments could be a smart thing to do. Since I’m passionate about finance and have plenty of time to manage my portfolio, I decided to trust my methodology. If you don’t feel comfortable managing your portfolio just yet, you can receive my portfolio update (I share everything) through my free newsletter:
Read: How to invest 100K
Third, get an action plan ready. Actions speak louder than words. You can talk about investing your money for months and you will wake up a year later with nothing done. Before I even receive my check, I had built a buy list with all the stocks I trust to fund my retirement when I grow old.
Read: How many stocks should you hold?
Lump-Sum Investing Vs Dollar Cost Averaging (DCA)
Now, the big day has arrived, and you wonder if you should invest all that money within a few days or weeks or if you should wait and invest a little every month. This strategy of investing a small portion of your lump sum over a 12 to 18 months period is called dollar-cost averaging (DCA). For example, let’s assume you want to buy for $12,000 of shares of Johnson & Johnson (JNJ). The DCA approach would consist of investing $1,000 each month during a full year. If JNJ shares go up or down during that time for an unexpected event, you will average the cost of your shares. The DCA is a seductive strategy when you fear JNJ shares will drop by 20% a few weeks after buying a lump sum of $12,000 in a single transaction.
Because there is no way I can predict what will happen in the next 12 months…
Because the more transaction I do, the more fees I pay…
Because I want my money to work for me and not me working for my money…
I decided to put all my money in the stock market as soon as possible. I don’t see a strong incentive to use DCA unless I was in early 2008 and knew what was coming. Keep in mind that seeing the market drop by ~50% during a short period is also a very rare phenomenon.
Here’s a very interesting article about the difference between lump-sum investing and dollar-cost averaging and a paper from Vanguard about the same topic.
How do you invest the money?
I like to keep things simple. I think that too many investors suffer from “paralysis by analysis” as they try to know and control everything. You can spend days, weeks, months looking at charts, metrics, comparisons and all you will do is waste valuable time and your money will still not be invested.
Here’s how Invested my lump sum of money:
#1 Build a virtual portfolio
Getting good results out of your investment is all about your asset allocation. If you don’t know in which asset class and in which sectors you want to be, there is no point in starting a stock filter and buy stocks. I started by selecting a portfolio model at DSR. They have been proven to post robust results since 2013 and performed well during the flash crash of 2018. You can get the results here.
You can use the Dividend Triangle to find great companies.
#2 Build my watch list
Once I decided what my portfolio will look like in terms of asset allocation, I spent time analyzing each stock in the portfolio model. I used the DSR stock cards and rankings to get a quick idea of which companies would fit well for my retirement portfolio. This is the hardest and longest part of the process as this is where you will wonder if you should or shouldn’t pick a company. Take the time to pick the right stocks, they will accompany you in your investing journey for a while after that.
Read: I didn’t wait to invest a lump sum of money
#3 Get the Lump Sum work for you – buy now
As soon as you get your check, you should put that money to work. Invest the proceeds in the stock market now. When is it now? It’s NOW.
- Don’t wait to see what the next FED meeting will say.
- Don’t wait for the next election round.
- Don’t wait for the next earnings season.
- Don’t wait for the “currently big conflict between countries” end.
- Don’t wait for the next market crash.
- Don’t wait for the time the market will be better valued.
Waiting isn’t paying. I agree with you that in an ideal world, you would buy stocks at the cheapest level possible. Unfortunately for you and me, those low prices were 10 years, 25 years, 50 years ago. The good news is that in 25 years, the good timing to buy stocks will be… today.
Bear markets, as we like to call them, take on average 2 years to recover. Will you really wait 1 month, 1 year, 4 years before the next market crash only to realize it would take 2 years to recover your money?
I invested a large amount in the market in 2017. 2 years later, my account was showing a total gain of ~+38%. If 2017 was the year of a massive market crash, my portfolio would have shown a ~0% return in 2019. And from then on, my money would continue to work for me. Does waiting work? Not at all.
If you are looking for more tricks and tools I use, I describe the entire process of my investment right here.
Good article Mike!
One thing: If the stock market plunged by 50% just after investing your money and your portfolio also lost 50% of its value, you should achieve a return of +100% to make up for the loss. So I don”t think your return would already be 0% in 2019 (at break even point).
Cheers,
Arthur
Hey Arthur,
At this point, 50% drop is highly hypothetical. Using Jan 1st to Dec 31st data, the worst S&P 500 drop ever was -47% and this happened 80 years ago:
https://t.co/srdMgHIvBf?amp=1
A massive drop would likely be 20 to 30%. Many investors make the mistake of expecting all bear markets to be 50%+ drops, that never happened in a single year.
Cheers,
Mike.
I don’t think it matters that much if you put it in immediately or over a several month period when you are way into a historically long bull market. You just need to eventually get it invested in a portfolio that matches your goals and then leave it alone. Four years ago I did some of both when I retired slightly early and I have no regrets.
As long as you invest ASAP, any strategy is good. Waiting is what kills return.
Congratulations on retiring early!
Cheers,
Mike
I remember going through this. I knew at the end of 2016 I was getting a lump sum from my pension of $212k so like many of your steps I prepared for the day it came. I developed a model portfolio primarily focused on dividend growth and diversified over every sector. I back tested the model and conducted a mote carlo analysis using portfolio visualizer.
I felt pretty confident and when the day came I loaded all of my limit orders and waited for them to execute. The first $110K of limit orders were invested in the first three months of 2017 but then the market kept climbing and my limit orders were not executing. Long story short it took a total of 14 months before all the orders were executed.
I could have accelerated my buys by changing my limit orders but much like you described I did have a little voice in the back of my mind asking if I was buying at a market top and doing the wrong thing.
Hello Ken,
You did what most people don’t in this situation: you had a clear plan and you stick to it. This is one of the most important thing to do when you have a lump sump of money to invest. The amount and the fear of losing money could be overwhelming. When you have a plan, you simply follow it and you don’t have to doubt again.
Cheers,
Mike
Bear markets take on average 2 years to recover : that stat is totally misleading and gives a false sense of security when investing in the stock market.
If someone really wants to stress-test his portofolio, he must invest the lump sum at the top of the 1929 and 1969 US bull markets and 1989 Japanese bull market. The bear markets that followed the peak lasted over 10 years each and it is only by computing the numbers that you can verify if your retirement plan is full proof. Most of the time, the draw down is so severe that you run out of money in less than 20 years… This needs to be thought out seriously if one plans to F.I.R.E. and rely on the stock market only to provide his retirement income for 35 years or more… Don’t accept statistical “averages” as truth and do your homework… You’ll be glad you did !
John,
I’m not sure you can replicate today’s portfolio and see how it would react 90 years ago. Most companies in my portfolio didn’t exist 50 years ago. Those which existed back in 1969 all show more than 4,000%+ investment return today (JNJ, MMM, DIS, KO).
Imagine you get a 3% dividend on your portfolio. It takes 10 years for your portfolio to recover, but then boom (JNJ, MMM, DIS, KO all show 200 to 300% return between 1969 and 1980), you are still good if you need to withdraw about 4-5% of your portfolio each year (since 3% of it comes form dividend).
You also forgot about the Tulip Mania in the 1600’s. Are you prepared for this? Just kidding ;-).
Salut Mike,
Tu viens d’où? Moi Val d’or mais j’habite à Calgary. Je serai à ton Webinar mardi. Sois sage.
Vicky
Bonjour Vicky!
J’habite toujours au Quebec (Granby). J’espère que tu as apprécié le webinaire 🙂
Bonne journée!
Mike
I just had to add 50k to our portfolio. I was tempted to sit on my hands, but we already had an ample cash position. So I added to two positions and a new position was added that will provided a great business and a fantastic money manager to our portfolio. This is the fun part, building something that will provide us with freedom of time.
Hi Mike, I’m impressed with your DSR 2023 Workbook and emphasis on dividends. As you know, on average companies paying no dividends, and also companies paying unusually high dividends, do worse than companies with an intermediate dividend yield. (There are always a few individual companies that break the rule such as Berkshire Hathaway, but they’re hard to identify.)
I’m also impressed with your sensible approach of holding about twenty stocks. Warren Buffett recommends that the uninformed person hold everything through a broad Exchange Traded Fund, while someone as expert as himself need only hold a handful, so holding twenty is a reasonable number.
Your 2017 plan to hold equities until 2046 or later is a very safe one. I’m a little concerned about advising retirees to invest everything in a lump sum “now” (or over a period of ten weeks), rather than dollar-cost averaging over a period of a few years, and I’ll tell you why.
Regarding the statement that bear markets recover in two years on average, I presume this refers to recent years. If I had invested broadly in non-dividend-paying companies when I graduated from UBC and markets were falling, it would have taken me 15 years just to get back my money in inflation-adjusted terms. In dividend-paying companies it would have taken less time to recover, but still taken more than seven years to catch up to safe money market funds.
Your portfolio has done very well during this last decade, which has seen a tremendous and unexpected rise in the stock market, that was largely driven by governmental quantitative easing on a scale never seen before, and that may never be seen again in our lifetimes.
For that reason, I feel the extraordinary bull markets of recent years are not a safe basis on which to advise retirees with investment horizons of less than fifteen or twenty years. I expect your advice is good for investing fun money as long as a person isn’t going to panic and sell when the market dips. That’s a big part of why ordinary investors average half the returns of institutional investors.
Hello Max, thank you for your comment!
If I had the choice to invest a lump sum amount of money today, I would do it one shot, but that’s just me. It’s not advice per se. We all have a different situation and a different point of view on investing. The key is to invest according to your plan and your values.
There are many valid options and strategies. We just have to find one that works for us 🙂
Cheers,