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Let's say you received an inheritance, sold a cottage or a boat, or ended up with a chunk of cash from dividends paid in your portfolio or from rebalancing your portfolio. Regardless of where the money came from, you want to invest it; but you’re hesitant, and you don’t want to make mistakes. You have to come up a plan that identifies where you’re going to invest and the timing of these investments.

Plan Where to Invest Your Lump Sum

Before deciding when to invest, you have to figure out which assets you want to invest in. To choose the right ones for you, you must review your investment goals and review your current portfolio. What if you don’t have a portfolio yet? There's no need to worry, we will go over such a scenario.

Identify Your Investment Goals

First, what do you want from your investments? Income, growth, or a mix of both? In what proportion?

Goals can change. In our earlier accumulation years, we might focus on growth and be willing to take more risk with speculative or volatile investments. As we get near or are in retirement, income can become more important.

Revisiting your goals can help to determine the following:

• Asset allocation: all stocks, or a mix of stocks, ETFs, bonds, GICs/CDs, etc.
• Sector allocation: the economic sector(s) you’re going to invest in, and in what proportion.

Review Your Current Portfolio

If you have a portfolio, you should review it. Identify adjustments to make to your existing investments and areas to strengthen with your new money.

Adjust Overweight Positions

Overweight sectors or stocks may make your portfolio more vulnerable. You could invest the lump sum into other sectors or industries to rebalance, or you could sell some of your holdings in overweight sectors. If you have overweight stocks, you may want to think about selling some shares.

Stocks representing very little of your portfolio, e.g., 0.75%-1.8%, don’t do much. Even if they double in price, you likely won’t feel it. If you’re confident and like your lightweight stocks, you could consider buying more.

Loser stocks hurt. Examine them thoroughly and choose whether they’re worth keeping or not.

After reviewing, compare your portfolio to what you want it to be, and come up with your game plan. You may find yourself investing more in stocks you already own, in new stocks to benefit from other sectors and industries, and overall making your portfolio more resilient. It is imperative to build a list of good candidates for your portfolio.

Don’t Have a Portfolio Yet?

If the lump sum is seed money for your brand-new portfolio, you should start by identifying your investment goals, as discussed previously. Next, find economic sectors you like and understand. Then, set the percentage of the sum to invest in each of the sectors and how many stocks you want.

Plan When to Invest Your Lump Sum

Once you know where you’re going, it’s then time to choose when to click the buy button. However, emotions often get in the way. You may fear putting your money in stocks, only to see them plunge soon after. You could hate the thought of waiting for a “good price to buy,” only to see it continually rise, missing out on what could be a good investment. You may be anxious about cash sitting in your account doing nothing.

All At Once?

Financial literature often says the right time to invest is today so that your money is in play, working to accrue wealth and not lying dormant. You could technically invest all of your lump sum as soon as possible and be done. However, I’m guessing you don’t feel like doing that. I understand completely.

With such an approach, you could end up buying stocks at the market high, finding yourself in the red for a while. Imagine investing 100% of your cash in July 2008, right before Lehman Brothers declared bankruptcy. That would have derailed your retirement plan completely.

What If I Buy When the Market is High?

Seeing your stocks down 20%, 30%, or even 40% doesn’t feel great, I know. However, if you’re a dividend growth investor like me, you likely invest in dividend growing companies with solid fundamentals and lots of potential for years to come. You may focus on total return, and plan on holding those stocks to enjoy the growing dividends.

With a long investment horizon, buying great stocks at a peak in the market, while not the ideal scenario, might not be the disaster it would be for speculative investors eyeing quick capital gains. Eventually, the market will go back up -- it’ll just take longer to see stock appreciation in your portfolio.

Waiting, and Waiting Some More?

Let's say that you may wait a bit to see what happens with the market due to uncertainty. After that pause, you may decide to wait for inflation to go down before investing. But then, let's say the market climbs. Well then, you’ll just wait for it to go down. It does, a bit. So, do you buy? No, because maybe it’ll drop even further. A pattern then develops; finding excuses to delay your investment.

Buying at Intervals

An alternative to this paralysis is to spread the purchases at intervals over a period -- six to nine months, for example -- to get some protection. If the market starts crashing tomorrow or next month, such a downward spiral usually would end in six months. Let's say the market does not recover the lost ground after six months, but it stabilizes. It stops deteriorating before beginning its recovery.

Market Spirals Down for about Six Months

If you invested chunks of your lump sum regularly along the way, you caught the peak and the valley and benefited from the decline to lower your average cost per share. You’re in the red, but less than if you had bought it all at the peak, and you’ll be back in the black sooner.

In contrast, if the market was starting to climb at the start of the period, you invested starting at lower prices that increased over the period, averaging out to a cost below market price at the end of the period.

Make Your Plan and Buy

Let’s say you decide to buy Fortis (FTS) and Granite (the REIT) for income, and Alimentation Couche-Tard (ANCTF) and Home Depot (HD) for growth.

First, you would choose your buying period: six to nine months, less or more if you prefer. You would then write down the dates for when you’d buy stock. Let's take a look at this process, using a six-month period for example:

• The immediate step would be to buy 1/3 of the total investment you plan for each company. Check which of the companies will soon announce their quarterly results. Wait until you’ve reviewed them before buying to see that nothing drastic happened recently.
• After three months, review the latest quarterly results to ensure everything’s on track, and then buy another 1/3 of each company.
• After another three months, rinse and repeat with the last 1/3.

Investing a lump sum with several planned purchases at intervals over several months can mitigate the risk of buying at a market high and being in the red for a while. It’s the remedy to the paralysis caused by emotions. It lets you act decisively, and gets your money working for you.

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