When To Invest a Lump of Money?
When should you contribute to your 401(k)? There are two popular schools of thought:
- Dollar-Cost Averaging: The market is volatile, so you should contribute substantially equal amounts over the course of the year. This keeps you from investing a huge lump sum just before the market dips.
- Front-Loading: The market goes up over time. Invest as much as you can as soon as you can to take advantage of the rising market.
Personally, I front-load whenever I can. Investments like retirement accounts already have annual cycles, so I'm already effectively dollar-cost averaging, just over a longer period (i.e., for a few months out of every year I contribute a large amount to my 401(k)).
The slogan of buy-and-hold investing is that “time in the market is more important than timing the market.” I'm inclined to think that this applies to front-loading, too.