When markets are rising, the odds suddenly turn in favour of lump sum investors.
I admire people who find an investment strategy and stick to it. I can't even settle on the basics, such as whether to drip-feed my money into the stock market on a regular monthly basis, or toss in a fat lump sum when I'm feeling bullish and have the money in my hand.
Last year, I avidly followed the principle of investing a little every month. Markets were down, and falling fast. Any lump sum I invested was chewed up faster than a juicy steak in a piranha tank.
Investing little and often seemed to me the only way to cope with such conditions. It makes the market turbulence seem less nakedly hazardous. In fact, investors can actually benefit from falling prices, as Neil Faulkner explains in the Pros and Cons of Pound-Cost Averaging.
Plus you avoid the agony of seeing a large slab of your money swiftly turn into fish bait.
Like it or lump it
But now I've flipped. I am back into lump sum investing, grabbing any spare money I can salvage from my 0% interest saving accounts and smearing it across a range of likely companies.
That includes BP (LSE: BP), Tesco (LSE: TSCO), Barclays (LSE: BARC), Aveva (LSE: AV), HSBC (LSE: HSBA) and ARM Holdings (LSE: ARM), some of which (but not all) I bought on the advice of The Motley Fool's Champion Shares service.
My thinking is that there is a reasonable chance the very worst of the economic turmoil has now passed (although worryingly, the FTSE 100 dipped 2.5% while I wrote this).
Stock markets don't wait to hear the starting pistol before racing off. They are halfway around the track before most investors have even got their spikes on.
I don't want to wait until the FTSE is at 5,500 or Barclays is trading at 500p before I get stuck in.
One lump or two?
Now some of you might see that as a lousy strategy. You probably think I've been sucked in by a bear market rally, and my recent investments will soon be swimming with the fishes.
And you might be right. All it would take is the whiff of another banking crisis and my portfolio will once again be underwater.
But that is the kind of chance that all investors take.
Keeping it regular
New research actually backs my flip-flop investment strategy. Over the last 12 months, when stock markets were being flayed alive, regular investors escaped with relatively minor injuries, according to the Association of Investment Companies (AIC), which promotes investment trusts.
Somebody who invested a £600 lump sum in the average investment company on 1 May 2008 was down 30% after 12 months, compared to just 7% for those investing a regular £50 a month.
Lump sum investors also fared worse over three years, suffering an average 27% drop, against 22% for regulars.
These figures suggest that in times of turbulence, regular investing can reduce your exposure to risk.
It also suggests that last year, I got my strategy right.
But over the longer run…
By contrast, when markets are rising, lump sum investors do better. If you had invested a £3,000 lump sum five years ago you would be up 26%, whereas our £50 a month investor would be down 10%.
Over 10 years, a £6,000 lump would have grown 44%, compared to just 15% for regular investors.
The longer you invest, the better lump sums work. Over 20 years, the growth figures are 301% and 88% respectively.
So with markets now more buoyant (until this morning anyway), history suggests I am adopting the right strategy by keeping it lumpy.
Of course, my strategy could backfire at any moment, if the IMF was suddenly called in to bail out, say, Germany.
Great Scott!
Many investments only work with a lump sum. I have just bought turnaround specialist Volvere (LSE: VLE), after yesterday's review from Steve Scott: Double Your Money With These Two Bargains.
You might argue that this is speculating rather than investing, but either way, a lump sum is the only way to go about it.
Ya big lump
So I appear to have settled on at least one strategy. To invest regularly when markets are choppy, and lump sums when it looks like smoother sailing.
This does come dangerously close to timing of the market, but I don't think it quite crosses the border.
I wonder how long my new strategy will last.
More from Harvey Jones:
> Harvey owns shares in BP, Tesco, Aveva, Barclays, HSBC, ARM and Volvere.
