The Pros & Cons Of Lump Sum Investing

Image by: 401(K) 2013
By Michael Sterling

No one likes to hear the word “debt.” The feeling of owing money to a bank, a loans company, or an individual is so nerve-wracking it can leave us hiding underneath our own credit. This is why the idea of lump sums can be so appealing. It’s paid, it’s done, and all you have left are healthy returns.

But there is another side to lump sum investing, and it’s not always a free ticket out of debt. Sometimes going “all in” as they say might create unseen damage for your your other assets, but a smart investor can read between the lines and know that lump sums are only as profitable as you make them.

“Extra” Is Key

If you have no extra money – whether it’s saved, inherited, profit from a sale, or from a pension plan – you should ask yourself if investing lump sums are a good idea? If there is no extra cash, you are stealing either from your credit, your assets, or your own future. Don’t purchase as if you’re spending with monopoly money.

Home Ownership: Go Big Or Go Home

In a recent study by the University of Adelaide, researchers found that owning a home doesn’t necessarily make you happy, however, happy and healthy people are more able to afford a mortgage since they are typically in better situations. True, owning a home won’t necessarily make you happy, but what it does give you is financial freedom.

Owning a home can be incredibly beneficial because it increases your networth. But going all in will drastically effect your other responsibilities if you’re not careful. It can also alter your future finances. Cars, bills, children’s tuition, medical needs, a possible relocation, and much more must be considered before throwing down your cash.

If you don’t plan on staying put for at least a few years, CNN Money says, lump sum mortgages are a bad idea. You can end up losing money if you sell it sooner than you should, even in a rising market.

If you can’t afford the typical 20% down payment, move on. Extra cash from your savings, sell of another property, or inheritance, are the only reasons why you should go all in towards a home.

*Here’s some advice: never borrow money or take out a large loan and consider that your “lump sum” investment. It’s only going to create a pile of debt.

Stocks: Invest Big or Build Your Returns

There’s a fantasy most beginning investors have in that you need to invest large sums of money towards a rising company in order to gain tremendous returnsWarren Buffet bought Geico stock in 1951 for $10,000, now it’s one of the leading car insurance companies. Though it has the ability to be overnight profit, there are factors to consider.

Stocks require research of the company. There’s a science involved that should always inspire where your money should go. But if all your money ends up in one place, you’re missing opportunities to invest in others that may be just as successful. Then you’ll really be kicking yourself.

*Here’s a tip: a good alternative is to spread your sum around the market. If you feel like another company has equal potential for growth, why not divide your sum in half and invest in both (or multiple)? When they grow to reach high returns, you now own stock in two successful companies instead of depending on one.

Start Up Companies: End On Top or Climb The Ladder

Consider start up companies like  your children’s allowance. Your kid approaches you and says they need extra money to do the things they have to do, like haircuts, wardrobe, or extra school activities for their college applications. Do you up the allowance or do you give them the equivalent of what they would have earned in 5 years in one lump sum?

Investing a huge sum of money towards a start up company can make you a very happy stock owner if it ever becomes the next big thing, but you’re not a psychic, and neither are they. Not only are start up company investments always a risk, but more often than not, beginning entrepreneurs don’t know how to spend money, and they put it towards unimportant things.

Bad spending will effect their company, which will in turn, destroy your investment. For peace of mind, it’s always a good idea to spread out your payments. Divide them in 3, 4, or 5 cycles. This way, as the company grows, you will be ride the wave alongside them in the stock market as well.