11 Jul 2023
Nick Maggiulli in his bestselling book, Just Keep Buying, addresses the question of whether to ‘Invest now’ (lump sum on day one) or ‘Over time’ (average in over 12-months). Maggiulli demonstrates that if you invested into the S&P500 over its history, averaging in underperforms the lump sum-upfront approach most of the time. In fact, the ‘Invest now’ approach outperforms ‘Average In’ by 4% in each rolling 12-month period, on average, and three quarters (76%) of all rolling 12-month periods from 1997 to 2020.
Maggiulli repeated the exercise for several different asset classes, including Bitcoin, US treasuries, gold, developed and emerging market stocks, etc., and, while the percentages differ, the conclusion is the same. Most the time the ‘Invest now’ approach is superior to averaging in.
He then considered risk. And yes, the ‘Invest now’ approach is riskier – the standard deviation of the ‘Invest now’ strategy is always higher than the ‘Average in’ strategy, when investing in the S&P500. However, for those investors concerned about the higher risk, Maggiulli suggests that a multi-asset portfolio may be more appropriate. He goes on to demonstrate that a lump sum invested into a 60/40 US stock/bond portfolio results in slightly better returns for the same level of risk than averaging into an equity portfolio.
We used FTSE/JSE All Share Index (ALSI) return data from January 1970 to December 2022 and replicated Maggiulli’s study by comparing the outcome for a lump-sum investor into the South African equity market versus an investor who averages in over 12 months. The results are uncannily similar for the SA equity market; the ‘Invest now’ approach also outperforms ‘Average in’ three quarters (74%) of all rolling 12-month periods, and, on average, by 7.5% in each rolling 12-month period. Intuitively this makes sense, as the returns for the South African equity market are highly correlated to those of the US equity market.
Figure 1 illustrates the performance premium of the ‘Invest now’ approach over ‘Average in’, over each rolling 12-month period since 1970.
Figure 1: ‘Invest now’ versus ‘Average in’ relative performance
Source: Morningstar and Ninety One calculations.
The worst time to invest a lump sum is just before a market crash. This is evident in the graph above for the 13 months from September 2008, whereafter the market crash meant that averaging in proved to be the better strategy. The peak ‘Average in’ outperformance of the ‘Invest now’ approach was 26% for the year to end May 2009. If you had invested R12 000 at the beginning of June 2008, you would have had just less than R9 000 at the end of May 2009; a loss of 26%. However, if you had averaged in by investing R1 000 per month over the same period, you would have protected your capital with a total return of 1%.
Looking back over history then, the time that averaging in outperforms is at the peaks before the market crashes. And, while it does not feel like it, true market crashes are not a regular occurrence, hence the fact that for most of the time it is best to simply invest now.
As is the case with the US study, this outperformance of the ‘Invest now’ approach over ‘Averaging in’ also comes at higher risk over all rolling 12-month periods. Again, this makes sense as when investing a lump sum, you are immediately fully exposed to equities, whereas when averaging in you have decreasing exposure/increasing exposure to cash/equities over the 12-month period. And, as we know, equities are a riskier asset than cash. Over the long term, the South African equity market has outperformed cash by at least 5% p.a., but at a materially higher standard deviation.
However, if you are concerned about equity risk, then perhaps investing a lump sum into a multi-asset portfolio, like the Ninety One Opportunity Fund, is a more suitable investment option. The following chart illustrates that averaging into the SA equity market has underperformed a lump sum investment into the Ninety One Opportunity Fund most of the time (76%) since the launch of the Fund in 1997. Importantly, you achieved this outperformance at similar/lower risk most of the time.
Figure 2: Invest now into Ninety One Opportunity Fund versus Average-into the SA equity market (ALSI) relative performance
Source: Morningstar and Ninety One calculations.
The ability for the Ninety One Opportunity Fund to actively invest across multiple assets classes, both locally and globally, has resulted in the fund achieving equity-like returns with lower volatility than the stock market. And, despite some shorter-term dislocations/breakdown in asset class correlations, portfolio manager Clyde Rossouw remains confident about the longer-term return-generating ability of the assets held in the portfolio. Clyde is maintaining a balance of exposures in the portfolio as he seeks to capture opportunities and protect against a multitude of risks.
If you are in the fortunate position of deciding whether to invest a lump sum today or average in over time, most often it is better to invest the full amount now. However, if the thought of investing a single lump sum concerns you, you should consider a multi-asset portfolio over averaging into the equity market, as the risk/return characteristics of multi-asset portfolios, including the Ninety One Opportunity Fund have proven to be superior.