99% of People Put Far Too Much Weight on How They Buy In!

Earlier (in 2022) someone who had sold a house asked me how to put the money to work. I suggested buying in batches—I was still bullish on the whole market! But for many people who are not mentally prepared, going all in is too aggressive a move.

To keep ordinary people from becoming fearful of the market, buying in batches may feel like a good approach (and it is only a feeling)! Statistically, however, its performance is not as good as a lump-sum purchase, and this has already been proven in a great deal of research literature.

If (in 2021) you had bought in batches over twelve months, you would have bought right at the peak. Of course, a lump sum could also happen to land at the very top, which is painful as well, but it also has the chance of buying at the low of a year like 2022. In terms of probability, the market always rises: over the past twelve years (2009-2026) the market rose every single year, so a lump-sum purchase at any time was correct. Only in 2021-2022 did the market form a top; a lump sum from mid-2021 into 2022 might show a short-term loss, but batching was no better than a lump sum either.

Unless you simply do not invest and hold cash the whole time—but that is not the question of how to buy in that we ordinary investors are discussing. Over the past twelve years, in eleven of them a lump-sum investment at any time was good; even a short-term loss lasted only half a year: the first half of 2022 fell, and in the second half the market began to rise.

The success of lump-sum investing in the market (2009 ~ 2026): 2026-2009 = 17 years in total, of which half a year declined; 0.5/17 = 0.0294, so the probability of a decline is less than 3%. That means a 97% win rate for a lump-sum investment rising, an expected value of 97%. A lump sum is still better, but ordinary people cannot do it and can only buy in batches—just do not drag it out too long. If you count from the 2000 peak to today, that is 27 years, of which 3.5 years declined; 3.5/27 = 0.13, so there is only a 13% probability that a purchase falls, and an 87% probability that a purchase rises!

Only if the market keeps falling for the whole coming year (and in a stock market whose index always rises over time, declines are the minority of periods), and only if you could know in advance that it will keep falling for more than a year, would batching make sense. Otherwise, whether the market is topping out, in an uptrend, or moving sideways, the expected value of a lump sum beats the performance of batching.

Any way of buying is acceptable; over the short term you cannot tell which is better. In the short term it is very hard to prove that any method raises your rate of return, but over the long term the power of the lump sum shows. For ordinary people, batching and a lump sum are equally difficult. Buy in batches and, when the market rises, you want to wait for a pullback; when the market falls, you want to see whether it will fall further. In the end, batching is no better than a lump sum. This is speaking on average.

There is no perfect way to buy in anywhere in the world. However you buy, as long as you buy a U.S. broad-market index fund at any time—and, more importantly, hold it for the long term and never sell—it will make you rich. Buying is not the decisive factor in investment success; holding long and standing firm as a mountain is the key.

When you are most fearful, you must be brave!

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Written by: James