Aaron Vincent Elkaim/The Canadian Press
As a 60-year-old recipient of a sizable inheritance, I would like to hear your thoughts about how to put a windfall to work. Do you recommend investing the entire lump sum all at once, or using a dollar-cost averaging strategy to invest gradually?
Studies have shown that investing a lump sum usually produces superior results. For example, a 2023 paper published by Vanguard compared returns for both strategies over rolling one-year periods from 1976 to 2022. For the dollar-cost averaging approach, the researchers assumed that $100,000 was gradually deployed into a global portfolio of stocks over three months, while the lump-sum method invested the entire amount immediately.
When results were compared at the end of one year, the lump-sum portfolio outperformed the dollar-cost averaging portfolio 68 per cent of the time, as measured by the MSCI World Index. What’s more, the researchers found that lengthening the dollar-cost averaging period resulted in even greater outperformance by the lump-sum strategy.
None of this should be surprising. The long-term trend for stock markets is up, after all, so the longer you wait to jump in, the more money you’ll usually leave on the table. But because markets also suffer periodic setbacks, the lump-sum approach doesn’t outperform every time. In 32 per cent of cases, investors would have been better off wading into stocks gradually.
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The results indicate that “you are usually better off investing immediately instead of holding back a portion of the potential investment,” study authors Megan Finlay and Josef Zorn said.
“Across global markets – including the United States, the United Kingdom, Australia, Canada, and the European Union – we see similar results.”
Jumping in with both feet is often easier said than done, however. With some pundits calling for a correction, particularly for high-flying U.S. tech stocks, plowing all your money into the market at once can feel a bit like pushing all your chips onto the table at the casino.
But there are ways to control your risk and, by extension, your emotions.
Just as important as your timing is how you plan to invest your money. Allocating a portion of your portfolio to conservative, blue-chip companies that pay rising dividends – such as Canadian banks, pipelines, utilities, power producers and real estate investment trusts – can help to control volatility. The regular cash payments not only put more money in your pocket, they can help soothe your nerves during market turbulence.
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I also recommend that investors supplement their dividend stock holdings with index exchange-traded funds that cover Canadian, U.S. and international markets. To further improve diversification and control your risk, it’s prudent to allocate a portion of your capital to cash, guaranteed investment certificates and/or bonds (or a bond ETF). The optimal asset mix for you depends on factors such as your risk tolerance, age and other sources of income.
With any luck, you’ll have a couple of more decades of investing ahead of you. In Canada, the average life expectancy of a 60-year-old male is about 84 years; for a 60-year-old female, 87 years. Whether you put all of your inheritance money to work now or deploy it in stages over the next few months, remember that time and compounding are your best friends as an investor. So take any short-term bumps in stride.
A friend and I were having lunch recently, and he had a question about the dividend yield for the S&P/TSX Composite Index. This prompted me to do some research. According to the TMX Money site, the index has an annual yield of about 2.51 per cent (as of the close on Sept. 12). However, using a spreadsheet I created listing the yields of all 210 index constituents, the average yield was about 2.36 per cent. Further, I calculated that if an investor purchased a single share of each company in the index, the yield would be just 1.52 per cent. My question is: Which yield is most relevant for the investing public?
The yield posted on the TMX Money site is the one that’s relevant for investors. The reason this yield is higher than the others is that the S&P/TSX Composite is weighted by market capitalization, meaning the most valuable companies account for the biggest share of the index. Many of the largest constituents on the index – such as banks, pipelines and energy producers – also happen to pay above-average dividends, which pulls up the yield of the entire index.
The two other yields you calculated are based on different methodologies. Adding up the yields of all the constituents and dividing by 210, as you did in the spreadsheet you sent me, will determine the index yield assuming all stocks in the index are weighted equally, which they are not. Similarly, purchasing a single share of each company in the index will effectively weight each stock by its price, which is not the same as its market cap. Some companies with very high share prices – such as Constellation Software Inc. CSU-T and Fairfax Financial Holdings Ltd. FFH-T – pay little or no dividends, which drags down the index’s yield when calculated in this manner.
Most investors buy the index through an exchange-traded fund, whose constituents are weighted in the same proportions as the index itself. As such, they will receive something very close to the index’s yield (minus the fund’s management expense ratio, which is typically very small). For example, the iShares Core S&P/TSX Capped Composite Index ETF XIC-T lists its distribution yield as 2.49 per cent (as of Sept. 12), which is virtually identical to the yield posted on TMX Money.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.