Many investors consider the last few years as one of the most hated bull markets. It seemed as though every positive day in the markets had some explanation or red herring attached to it as to why it would not last and how a market drop is just shy of a certainty. Then, as markets continued to rise, these opinions seemed to become even more justified with the simple logic that if things were overvalued when markets were up 10%, they are surely even more overvalued at 20%.  This consistent negative outlook has resulted in many investors sitting on cash and missing out on returns. So for those who are tired of waiting for the next recession or correction or bubble or black-swan event (the list of negative events out of investors control truly are endless), how should they enter the market?

There are typically two strategies an investor can use to enter markets: 

Going all-in:

Putting all of your resources that are earmarked for investing, into the markets at once (lump-sum investing) is the more difficult strategy from a psychological standpoint but has its merits. Research done by Vanguard provides some pretty compelling evidence that investors are better off investing in a lump sum, opposed to averaging into markets. The general crux of the finding is that with the steady rise of markets over the long-term, the earlier cash is invested, the more time it has to generate returns and grow. Obviously, past performance does not indicate future returns but the general trend of rising markets over a long time frame is a tough theme to ignore. Another area that investing in lump sums proves to be effective in is that of transaction costs. While often overlooked, transaction costs can add up over time and weigh on portfolio returns. Investing funds all at once can significantly reduce these costs and results in just a bit more of your cash compounding. In the scheme of things, the savings on transaction costs may be minimal but at the same time, why not save a few bucks if you can?

Averaging in:

Many (if not most) investors prefer to average into positions and even though statistics might disagree with the strategy, it can make a lot of sense thanks to psychology. Putting all of your money into an allocation/investment at once is a big statement on an investors’ confidence with the position. Watching it go down the next day can quickly make anyone question their logic and cause them to sell the position in fear of ‘missing something’. At this point, getting back into the position can be very tough. Dollar cost averaging takes care of the whole psychology issue. It helps to smooth out the ups and downs of the markets and limits second-guessing which is likely to lead to the wrong decisions at the wrong time (panic selling). In many instances, investors being comfortable with their decisions can be much more valuable than trying to optimize a return and squeeze out another one or two percent. If an investor is happy with a past decision, they are more likely to stick with it over the long term.

If an investor truly has a long-term investment strategy and can handle the usual market volatility, making a lump sum investment could be the way to go. Investors that tend to question their investments and get nervous with short-term volatility may be better suited to dollar cost averaging. Investors need to know themselves and carry out a strategy that complements the way they think because the truly important aspect of long term investment success is to be in the markets and not waiting and debating on when and how to get into them.