How to invest your savings: lump sum, monthly or on dips

Before you invest your savings: three questions

Before deciding how to invest your savings, it helps to have answers to three questions. This is also where investment consultations begin, because the answers determine which approach and which instruments make sense for you.

The horizon is decisive. If the money will be needed in two or three years – to buy a flat, for instance – taking on significant equity risk is not appropriate: after a fall there may be no time to recover, and you could be forced to sell at a loss. That does not shut you out of financial markets. Over short periods, money-market instruments and short-term government securities offer a lower but far more predictable return.

There is a common pattern too: people arrive with short-term goals of two to four years and end up staying invested much longer. It is worth being honest with yourself about what the money is really for.

• How much you have to invest, and how you will add to it over time.
• When you will need the money, and for what – a child’s education in 15 years, say, or a looser goal such as a new car or a move.
• How large a fall you can bear along the way, both financially and emotionally.

An emergency fund and realistic expectations about falls

The second step is an emergency fund covering a few months of normal living costs – the episode mentions two to four months. Only money above that goes into the market. Otherwise an unexpected bill, such as a car repair, can force you to sell investments at a loss at the worst possible moment – a classic beginner’s mistake that is easy to avoid.

Just as important is knowing how you will react when you see your account in the red – not on paper, but for real. Falls are not the exception; they are part of how markets move. Over recent decades the market has had a correction of around 10% at some point in almost every other year, and deeper falls and financial crises recur too. If you have been warned and your horizon is long, such a fall is much easier to sit through.

Path 1: investing a lump sum all at once

The first approach is the most direct: you deposit the money and invest it straight away. Historically it has beaten splitting the sum into parts in roughly three cases out of four, because markets rise most of the time and every month spent waiting means missed growth. Past results, however, are no guarantee of future ones.

The price is that you take on the full risk from day one. A useful test is to ask: how would you feel if your portfolio fell by 50% and you had to wait five years just to break even? That is what someone who bought a broad US equity index in October 2007, shortly before the mortgage crisis, went through. If the answer is “I can live with that”, the approach is an option; if not, it is a reason to think again.

Investing a lump sum tends to suit people with a long horizon, a higher tolerance for risk and the composure not to react to falls. Over a 20-year horizon equities are the main engine, while a balanced portfolio gives up some return in exchange for stability. And when the market is expensive on valuation measures or heavily concentrated in a handful of companies, the historical statistics are a weaker guide.

Path 2: equal monthly instalments

The second approach is to invest a fixed amount at regular intervals – monthly or quarterly – usually in exchange-traded funds that track broad market indices. It suits two quite different profiles. One is someone just starting out without a large sum, who can begin small by setting aside part of their salary each month. Kliment Robev recalls a young woman who was genuinely struck when a compound interest calculator showed her what regular contributions can build up over a long horizon with low fees. The other is someone with capital who is not prepared to sit through a serious correction and so spreads their entry into the market over several months.

The advantages are clear: you start without stress, get a feel for how the market works without thinking about it constantly, and follow a single rule. So is the cost: historically, splitting the sum has more often lagged investing it at once. In other words, you give up a little return and gain peace of mind. If you choose this path, it is best to fix the schedule in advance – with set dates in your calendar, for example – and keep to it whatever the headlines say.

• If the market surges early on, you are invested with only a small amount and miss part of the rise.
• The most common mistake is stopping contributions during a fall – precisely when each instalment buys more units and averaging works hardest.
• Years later, once your capital is larger, a serious correction is felt more keenly.

Path 3: a reserve for buying when the market falls

The third approach combines a permanent investment with a reserve set aside in advance. Part of the capital is held in equities – through broad-index funds, for example – while the rest sits in low-risk instruments such as short-term government securities, waiting for a fall. The reserve should not be held in an asset that falls together with shares: the episode recalls that even gold lost value in the 2008–2009 crisis, as investors sought cash.

The rules work in both directions. If the market drops 8%, nothing happens: the temptation to “take advantage” early uses up the first tranche, and if the fall deepens the plan is already broken. When the market recovers and moves past its previous highs, part of the equity holding goes back into the reserve so that it is ready for the next correction – again by rule, not in a rush at the first new high.

The reserve earns little, and over the long run this portfolio lags the market. Its aim, though, is not to keep pace with an index but to give you peace of mind and protect you from the costliest mistakes – panic and leaving the market at the wrong moment.

• Example: of €60,000, 60% is in equities and 40% (€24,000) is held in reserve.
• If the market falls 15%, the first third of the reserve – €8,000 – is invested.
• At a 25% fall, the second third is invested.
• At a 35% fall, the final third.

How to choose – and what to do when the market falls

There is no single right answer. The difference between the three approaches lies less in returns than in how you will feel along the way. The choice follows from the three opening questions: the amount, the horizon and the fall you can bear. The approaches can also be combined. Kliment Robev himself says that by temperament he prefers the second and third: regular contributions to broad-index funds and, with individual shares, building a position gradually as the price falls rather than going in all at once.

“I’m waiting for the market to fall” is not a plan. Without predefined levels and amounts, the negative news that arrives with a fall usually stops people investing, and by the time markets recover the chance has gone. Even an investor who somehow bought at the lowest price every year would beat a disciplined investor buying at the start of each year by a surprisingly small margin. What decides the outcome is not knowledge or experience but sound rules and iron discipline.

• Check whether the fall is within what you prepared for.
• With instalments, the plan is for contributions to continue on schedule.
• With a reserve, action is taken only at the levels set in advance.
• Decisions are not made under the pressure of panic and media noise.
• If you find the rules hard to keep on your own, an outside view – a consultant’s, for example – helps maintain discipline.

Frequently asked questions

This guide is based on season 2, episode 7 of the podcast “Пари и посоки” (Money and Directions), on three ways to invest savings you have already built up. Summary →

Views reflect his position at the date of publication and are not investment advice. Regulatory information