Is it better to invest all at once or to spread it out over time?

While drip-feeding your money lowers short-term risks, investing your entire ISA allowance at the beginning of the tax year gives it more time to grow

What is the best strategy?

When you have a large sum of money to invest, should you drip-feed it in installments or put it all at once in your stocks and shares ISA?

With a new tax year starting and a new 20,000 ISA allowance in place, some investors will be asking themselves this question.

According to research by the investment firm Vanguard, two-thirds of the time, lump-sum investing outperforms drip-feeding. But because of pound cost averaging, drip-feeding can help reduce short-term risk.

Regardless of market conditions, pound cost averaging involves investing set sums of money at regular intervals. You purchase more units during periods of low price and fewer during periods of high price.

According to the investment platform, investors benefit from having been fully invested from the beginning when markets are rising, and this pattern of lump-sum investments outperforming is especially true during these times.

Because of the opportunity cost of holding cash on the sidelines in situations like these, investors who spread their investments out over a longer time horizon lose out.

However, there is no one-size-fits-all strategy, and pound cost averaging can help investors remove emotion from their investment decisions. This is something to think about right now as market volatility persists. In the near future, it may also lead to a more seamless investment experience.

As stated by James Norton, head of retirement and investments at Vanguard Europe, "the important thing is to follow your plan, even when the market gets a little bumpy, regardless of whether you choose to invest a lump sum, make regular contributions, or combine the two approaches."

In this regard, it's critical to keep in mind that fluctuations in the stock market are a normal aspect of investing. Even though your investments could increase or decrease, history demonstrates that shares increase in value over extended periods of time and usually yield higher returns than cash.

Pound cost averaging versus lump-sum investing.

From the US to international and emerging markets, Vanguard's analysis covers a wide range of geographic areas. One-year rolling investment performance from 1979 to 2022 was examined by the investment platform. It also took into account a variety of investment splits, such as dividing the lump sum into three, four, five, and six installments, with each installment being invested one month apart.

The table's "hit rates" indicate the percentage of times, over a one-year investment period, one strategy outperformed the other.

Source: Vanguard. US data derived from the 1979 - 2022 Russell 3000 Index. Data from the UK is based on the 1986 - 2022 FTSE All-Share Index. SandP/TSX Composite Index, 1985 - 2022, is the basis for Canadian data. Data from Europe based on the MSCI Europe Index, 1998 - 2022. Data from Australia is based on the 1992 - 2022 S&P/ASX 300. The MSCI Emerging Markets Index, 1988 - 2022, is the basis for emerging market data. Based on the MSCI World Index, 1976 - 2022, this data is global.

Some investors still prefer to make their investments in installments.

Although investing in one lump sum is usually preferable to drip-feeding your money over time, not everyone finds success with this strategy.

There are more pragmatic reasons to invest in installments, but we have already explored the advantages of doing so for reducing short-term volatility (pound cost averaging).

It would be necessary to have £20,000 on hand at the beginning of each tax year if you wanted to invest your entire ISA allowance in one lump sum. There aren't many people like this.

It may be simpler for you to budget if you divide your ISA allowance into twelve installments of 1,666.66 or less each month.

If you set up a direct debit, you won't have to worry about forgetting to contribute each month. Additionally, it will eliminate the temptation to put things off and watch markets decline, which is typically a bad idea in the long run.

Alice Haine, personal finance analyst at investment platform Bestinvest, stated that "investing can get clouded by market noise, causing investors to second guess whether buying an asset at a certain point is the best decision, particularly when markets are topsy turvy."

When you take into account how hard it is to predict short-term market movements, investing regularlyfor example, monthlyas opposed to timing a lump sum investment means an investor consistently makes investments regardless of whether markets are up or down.