"My husband and I have a lump sum of cash that we need to allocate into our retirement portfolio. I want to gradually and evenly buy into a diversified portfolio. What is the recommended time frame to do this? A year, 3 years?"
Second week in a row with a question regarding a great problem to have. At the same time, I completely understand your concerns here. What you are asking about is what is often referred to as dollar cost averaging. This involves investing a defined amount of money on a regular basis. As an example, you have a lump sum of $60,000, and you elect to invest that money in intervals of $10,000 on the first of the month for the next six months. The idea here is that if the market goes down you will be buying more shares of the investments as the market declines. I need to also point out that as the market rises, you will be buying fewer shares of the investments.
To succinctly answer your question, there has been a lot of research on this topic and independent studies by Fidelity and Bernstein Global Wealth Management have come to the same conclusion that it is better to invest your lump sum all at once. This is also somewhat intuitive because historically the markets rise more than they fall. After all, if the reverse were true, why in the world would anyone invest? So there you have your answer and you are going to run and invest all your money today, right?
If you set your emotions aside, you might do just that. For most of us though investing is also emotional, and it is important to recognize this. In many cases, it is critical to not make financial decisions based on emotions. In this situation, I think there is some leeway for emotions, and I would advise that if you are more comfortable investing a large lump sum over time then you should do it. Knowing that statistically speaking it is usually best to invest it all at once, it probably also makes sense that a shorter period of time is better. This is also confirmed by research that concludes a period of time of six months or less is preferred. Anything greater than 18 months doesn’t make financial sense and should not be considered.
The most important point that I would like to emphasize is that if you choose to invest your lump sum over time, you MUST pick an investment schedule and stick to it. That means that you predetermine how much you will invest each time and on which dates you are going to make the investments. If you don’t do it this way, then I am afraid your emotions will play into when you invest. As alluded to earlier, this is one of those times that it is critical that financial decisions are not made based on emotion.
I know this can be a nerve-racking time because the last thing you want to do is pick a day to invest and a day or a week later the market goes down and you kick yourself. It is often human nature that our fear of financial loss exceeds our desire for gain. Try to overcome this natural feeling and invest it all at once. If not, then at least invest it over a short period of time with a clearly defined plan.