Rarely does a topic create as much controversy for asset managers and planners as ‘phasing’. If one has a lump sum, should one invest it at once or phase it in over 3 –12 months?
The answer depends largely on market volatility and pricing. A study by US asset manager Vanguard shows that in 66% of the ten-year rolling periods during 1926 -– 2011, lump sum investing produced better returns than phasing. Similar local research by Glacier produced a 75% positive result.
This means that phasing was successful 25–33% of the time. Phasing takes the emotion out of investing: otherwise, when the bulls are running, investors can’t invest fast enough; and when markets are collapsing they can’t get out fast enough.
This applies not just to investment markets but currency markets and offshore investing as well. Many South Africans will painfully recall moving money offshore at the nadir of rand weakness and the peak of the offshore equity bull market, thereafter to wallow for ten years while the rand appreciated back to R6/USD. Portfolios were literally halved.
TO PHASE OR NOT?
The above research studies indicate that except for times of extreme market volatility, even in expensive markets lump sum investments will generally outperform phasing. Equity markets generally rise in tandem with improving company profit, provide a better return than cash and make it an expensive decision to be out the market.
The real issue is often an emotional one whereby investors accept the price of lower returns so as to sleep better at night. In addition, most financial advisers suggest when investing in equities that one adopt a time horizon of at least five years – a factor which then completely obviates the discussion around short-term volatility and phasing. Multi-asset class funds also provide comfort, where professional managers optimise tactical asset allocation between cash, bonds, property and equity. Finally, country and currency risks are increasingly hedged by offshore fund managers.
There’s rarely a right or wrong decision. Rather, one needs to understand the decision being taken.
Author: Mike Lledo CA(SA) is the CEO at Consolidated Financial Planning