The Canadian, US and international markets all fell more than 5% last week, the sharpest weekly drop we’ve seen in almost four years. Then on August 24, global markets plunged even further. If you were waiting for a pullback to give you a buying opportunity, you just got it. But if you’re sitting in cash and paralyzed with fear, you’ve just learned how you can get into trouble when you invest without a plan.
Let me be clear before we go further: I’m not recommending that investors hoard cash and wait for big drops like this one. Let’s remember that the last time we saw a sharper one-week decline was September 2011. The opportunity cost of being uninvested—even for a couple of months, let alone four years—can be enormous. So if your savings are coming from a regular paycheque, you are better off setting up an automatic investment plan that removes the emotion from your decision making.
However, If you recently came into a large lump sum—from an inheritance, the sale of a property or business, or a pension payout—things are a little different. You are still likely to be better off investing the lump sum immediately rather than spreading it out over a year or two: studies have consistently shown that the all-in move delivers better results about two-thirds of the time.