Portfolio Dilemma: invest a lump sum, or wait for markets to fall?

Linda asks: I would like to invest a lump sum, but my concern is that I will be putting money into the market ahead of a potentially steep fall. The global stock market has performed strongly since the Covid-19 pandemic, which makes me wary. There are also no shortage of risks, including fears of an artificial intelligence (AI) bubble. Should I wait for a better opportunity to invest a lump sum or will the price of staying on the sidelines be more painful?

When stock markets have posted strong performance over a short time frame there’s a natural tendency to adopt more of a glass half-empty attitude. After all, no one likes the prospect of entering the market at a potential peak ahead of a pullback.

However, the reality is that it’s almost impossible to identify market peaks and troughs. And there’s always something for stock markets to worry about. In fact, if there were no headwinds threatening to blow stock markets off course, that in itself would be a concern as it would be a sign of potential overcomplacency. 

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The thing to bear in mind is that some level of volatility is inevitable when investing in equities. It is the price investors pay for the fact that, over the long run, investing rather than leaving your money in cash tends to yield greater rewards.

Over the long term, while there are no guarantees, history shows that stock market investing outperforms cash savings. According to Barclays’ Equity Gilt Study 2025, UK stocks have on average returned 2.9% a year in real, inflation-adjusted, terms over 20 years. In contrast, cash has lost 1.8%. The same study found the probability of UK shares outperforming cash over 10-year periods is 91%.     

Over time, stock markets have repeatedly recovered their poise after major stock market sell-offs including the global financial crisis and the Covid-19 pandemic.

The key is to be patient, disciplined, think long term, and remain diversified by owning a mix of different types of investments. Doing so, helps to ensure that a portfolio is not overly focused on a particular type of investment, region, sector, style or theme, for example.

Adopting a long-term time horizon also allows investments to benefit more from the power of compounding, the phenomenon in which investment returns themselves generate future gains.

As a rule of thumb, five years is considered a sensible minimum time frame to own a fund and to judge its performance.

However, the risk is that those who invest ahead of fall then lose their nerve and sell. This results in the double-whammy of losses being crystallised, then the investor missing out when markets recover.   

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Research by Vanguard hammers home the point about focusing on the long term. The study looked at what would have happened if an investor put money into the stock market before each major market sell-off since 1997. In this hypothetical scenario, the investments were made into the FTSE All World – an index of global shares. By the end of February 2026, the overall £45,000 contribution became £197,963. If the same £45,000 was held in cash savings over this near 30-year period, it would have turned into £63,980.

To provide another example, let’s consider how an unlucky investor in global tracker Vanguard FTSE All-World ETF  (LSE:VWRP) would have fared if they bought just before stock markets tanked in response to Covid-19 being declared a global pandemic. An investor who bought this ETF on 18 February 2020 before selling in a panic just over a month later at the worst possible point on 23 March 2020, would have lost -24.3%. From 24 March 2020, global stock markets started their recovery. If the same investor had held their nerve, they would have got back to even by September 2020. And if they had held on the entire time, they would now be sitting on a gain of 109.8%.

Ways to reduce risk

A reliable way for an investor to reduce the risk of entering the market at a disadvantageous time is to drip-feed money into an investment on a monthly basis. A regular plan, involving investing at the start of every month, for example, does away with the risk that you might put all your cash into the market just before a nasty dip. Similar to household bills, you can set up a direct debit to take a specified amount out of your bank account every month. Regular investing is free on the interactive investor platform.

This strategy benefits from what is known as pound-cost averaging. When stock markets fall, the regular investment purchases more shares or fund units. Conversely, when stock markets rise, fewer shares and fund units are bought. This helps balance the performance of your investments over time.

Lump sum vs regular investing

Generally speaking, when markets are buoyant, lump-sum investing wins out over investing regularly on a monthly basis.

However, while investing a lump sum can in some situations be more profitable, it is higher risk than drip-feeding your money into the market. Given that the regular investing approach guards your investments from rapid rises and falls in markets, it is a price that many investors are prepared to pay for peace of mind.