So you have money set aside that you want to invest, but you’re not sure how to go about it.

An important factor to keep in mind is that the amount you have to invest can alter one important factor of the investment:

The risk.

Story Time

Here’s an example.

Let’s say you’ve been investing $50/week for the last year, but come into a $5,000 check. Maybe it’s from an inheritence or maybe you found it on the street.

Either way, you decide that the best thing to do is put it away by investing it so it grows without being spent.

Let’s also assume that the market happens to be up at this point in time.

Normally, the exact position of the stock market doesn’t matter much because you are dollar-cost averaging (investing small amounts on a regular basis).

However, when you invest a large sum of money, such as $5,000 when your entire portfolio up to that point is $2,600 (52 weeks * $50/week), it drastically shifts your average cost.

This is a difficult concept to clarify with an image, but here’s my best shot.

Investing an amount of money that’s nearly twice your entire portfolio at the wrong time can stunt your portfolio’s growth for a long time.

So Why Not Just Time It Correctly?

That ^ is easier said than done.

Stock traders have been trying to time the market for 150+ years, and no one has been able to consistently do it for any longer than a couple of years.

For the vast majority of people who have tried, it has resulted in far more losses than returns.

The market can fluctuate by 5% in a day with zero warning.

Sure, there’s a possibility you choose the right time and make a big win, lowering your average cost.

This is why investing a large amount has such an effect on your risk level.

You might get it right, you might not.

It’s just up to you whether the risk is worth the reward.

How Can I Lower My Risk Level?

I’m glad you asked.

By not investing the whole sum at once.

The best strategy in the above example would be to up the $50/week to, say, $200/week, until the $5,000 check is gone.

Then, go back to $50/week.

Your risk still increases slightly since you’re investing more for that period of time, but it’s far less risky than doing it all at once.

If you want more info about investing a lump sum of money, check out https://www.financialbirdsbees.com/pages/lump-sum-calculator

With that, we end this week’s newsletter.

Best of luck,

Evan

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Before You Go

This is just a free tool available to everyone, no strings attached.

Ideally focused on people who have not yet set up a 401k, the 401k Kickstart aims to give you the fundamentals of a 401k in an easily digestible package.