Assuming you had to choose between investing a lump sum of GH¢60,000.00 now or investing GH¢1,000.00 a month for the next five years, which option would you pick? It is not an easy decision to make because there are many advantages and disadvantages with each option. And I will start of discussing them before we look at the figures.

Advantages of Lump Sum Investing

1. Simplicity. You just drop your money and go away until the maturity period.
2. Does not suffer inflation on the money waiting on the sideline yet to be invested.
3. Makes the most of high returns in early periods.

Disadvantages of Lump Sum Investing

1. High initial outlay. I mean how many of us have huge sums to invest as opposed to a percentage of our monthly income?
2. Difficult to sustain due to temptations to withdraw the amount when an emergency comes up.
3. Suffers the most from poor returns in early periods.

Advantages of Monthly Deposits

1. Lower barrier to entry. Easier to save a percentage of your monthly income than to save multiples of your annual income to invest at once at once.
2. Relatively easier to sustain. It is more likely that you would not jump on a few monthly deposits made in case of an emergency as compared to a huge pot of money placed in an investment.
3. Spreads the risk of poor returns evenly over the period.

Disdvantages of Monthly Deposits

1. Complexity. Unless you use a standing order, it is not easy to go invest a fixed amount each month. And if your salary delays, even the standing orders may not work and you’d have to do it manually.
2. The funds left on the sideline waiting to be invested are forgoing returns that could have been made. (But if you don’t have money on the sidelines you don’t have to worry.
3. Because it spreads the risk of poor returns it means it also does not make the most out of periods of good returns.

Now that we have the general observations out of the way, let us look at the numbers. First, our assumptions:

1. It is possible to invest in all stocks on the GSE in order to perfectly align returns with the GSE-CI.
2. Fees, commissions, taxes and inflation is ignored.
3. The lump sum is invested at the start of January 2015.
4. The first monthly deposit is made at the start of January 2015 and the start of each month after that with the last month being December 2019.

With these assumptions stated, let’s see what happens if you compare a lump sum investment of GH¢60,000.00 in the GSE from January 2015 – December 2019 compared to investing GH¢1,000.00 at the beginning of each month over that same period.

As shown above, the monthly deposits start to win out in terms of total returns by the latter months of 2015. This is easily explainable. In 2015, the GSE started with poor returns which the total lump sum would have been affected by while only the monthly deposits invested at that point would have suffered. Once the lump sum begins with negative returns, it is very difficult to make up for it later and thus monthly deposits win out.

Year End	Lump Sum Balance (GH¢)	Monthly Deposit Balance (GH¢)
2015	52,329.63	11,001.91
2016	44,307.49	20,450.66
2017	67,670.11	46,452.59
2018	67,473.37	56,632.63
2019	59,208.59	61,197.98

By December 2019, the lump sum would be worth GH¢59,208.59 while the monthly deposits would be worth GH¢61,197.98, almost GH¢2,000.00 more. The overall returns for the lump sum would have been positive 45% of the period while the monthly deposits would have been positive 53% of the time.

So from 2015 to 2019, we see the disadvantages of a lump sum in a spectacular fashion. The poor performance from the start of the year affects it all the way to the end period while the monthly deposits perform better because they spread the risk.

But what if we encounter a scenario where the lump sum gets the benefit of starting with generous returns? We see a scenario like that from 2017 to 2019. Imagine investing GH¢36,000.00 from the start of 2017 to 2019 versus investing GH¢1,000.00 per month over the same period. Below are the numbers.

Year End	Lump Sum Balance (GH¢)	Monthly Deposit Balance (GH¢)
2017	54,982.22	12,141.93
2018	54,822.37	24,141.93
2019	48,107.21	36,141.93

Table 2 shows a complete reversal of fortunes. The lump sum of GH¢36,000.00 benefits from the 50% return from the market in 2017 and holds those gains against the poor performance in 2018 and 2019. The monthly deposits however grows at an almost even rate over the period. This leads it to return almost GH¢12,000.00 less than the lump sum option.

The performance difference in terms of total return is so vast that the chart in Figure 2 does not even matter. We definitely know from the values in Table 2 that an early period of good returns carries a lump sum far beyond what monthly deposits can deliver.

So in summary, lump sums do well with maximising returns when they occur early but it also maximises losses when they occur early. Monthly deposits on the other hand are good for risk management because they spread the risk.

This post won’t settle this matter but it should help in making decisions. I will produce more content on this investment question in future but in the meantime, you can leave a comment if you have any questions. Do share this post if you found it useful and check out more content on this blog.