Lump-sum investment or savings scheme - which strategy is best for you?

Say you have a large sum of money that you want to invest. Does it makes more sense to invest it all at once, or might it be better to use it to invest smaller sums regularly. Both approaches have some benefits and disadvantages, and which one you choose will depend on your financial situation and your goals. 

The cost-average effect is particularly interesting in this case: it has an important role to play when it comes to saving money. So what does that mean, exactly, and why is a combination of a lump-sum investment and savings scheme often the best solution?

What is a lump-sum investment?

A lump-sum investment means investing a large amount of money all at once into an investment product, such as ETFs, shares or funds. This is an interesting option if you have a certain amount of capital to begin with.

Lump-sum investment benefits:

• Builds wealth immediately: your capital is immediately invested in its entirety and can reap the benefits of the market from day one.
• Simplicity: You simply decide what you want to invest in and don’t have to plan for any additional regular investment amounts. However, it will still be important to keep an eye on your investment and check regularly that it is still working for you. This ensures that it continues to meet your investment goals and that you can react to market developments. You might also choose to have an investment expert take care of this for you.

Disadvantages:

• Timing: If you invest before a drop in the market, you might end up losing money.
• Psychological barrier: Investing large sums of money all at once requires you to be daring, particularly considering market fluctuations.

What is a savings scheme?

A savings scheme allows you to pay regular (e.g. monthly) fixed sums of money into an investment product. This model is suitable for investor who wish to take a step-by-step approach to investment - whether they are building wealth or investing in their retirement.

Savings scheme benefits:

• Flexibility: savings schemes can be adjusted, paused or stopped at any time.
• Ideal for long-term goals: small, regular investments allow you to accumulate considerable wealth over time, without needing a large amount of capital to start off with.
• Cost-average effect: This effect balances market fluctuations, more below.

Disadvantage:

• Takes longer to reach its full potential: you will only be investing small amounts on a regular basis, so you won’t be taking full advantage of the market immediately.

The cost-average effect: regular investments reduce risk

The cost-average effect is one of the main advantages offered by a savings scheme. But what is it, exactly?

Here’s an example: Imagine you invest 100 euros each month in an ETF, which is obviously subject to fluctuations in price. A share costs 10 euros during the first month, 8 euros during the second and 12 euros during the third.

First month: You purchase 10 shares (€100/€10)

Second month: You purchase 12.5 shares (€100/€8)

Third month: You purchase 8.33 shares (€100/€12)

You have purchased 300 euros worth of shares in total, with an average purchase price of €9.73 euros – lower than the 10 euros they would have cost if you had simply invested a lump sum.

This effect is particularly helpful in volatile markets, as it reduces the risk of investing at the highest price. In addition, this smooths out fluctuations within your portfolio, and you benefit from a solid cost-average effect.

Why not both?

A combination of lump-sum investment and savings scheme is an excellent investment strategy for many investors. It allows you to make good use of both approaches:

• Get started immediately with a partial lump-sum investment: Let a part of your investment get to work for you immediately, and profit from potential market gains.
• Spread risk with a fixed-term investment plan: by regularly investing the remaining money, you can balance market fluctuations and reduce the risk of investing at a bad time. The investment term should not be too long.

Whatever you choose to do with a larger sum of money you wish to invest, a savings scheme, in which you use your liquid assets to invest money on a regular basis, is a very sensible investment. When saving for retirement, for example. Take advantage of your bank’s consultation services to find the best investment strategy for your goals.