Dividing a lump sum into instalments helps avoid joining the market just before things go pear shaped.

Investing is never easy.

When things look cheap it's usually because the economic climate looks dicey and there are many things that could go wrong, like in 2008. By the time things have stabilised and there are tangible signs of improvement, prices have already moved to reflect this and there aren't as many bargains around.

At the moment, there are varying points of view about how stable the economic outlook is, but there is a lot more agreement about how expensive markets are looking.

It's tough to find anything offering great value at the moment. Bonds and fixed interest investments have seen their prices bid up so high that they are offering very low interest rates. Shares have had an outstanding run over the past five years, and it would take the most one-eyed of property investors to argue that bargains are easy to find in the local real estate market.


For investors who have established portfolios, this isn't a major issue. They are already sitting on healthy gains, and the dividend and interest payments keep rolling in. If they are getting edgy about rising markets, it's easy to reduce a bit of risk, rebalance into safer assets and take a few profits to hedge their bets.

For new investors with lump sums they would like to put to work, things are more challenging. Jumping right in with the proceeds of your business or farm sale is hugely disconcerting. The obvious worry is that you'll get your timing dead wrong and end up making your investment just before things go pear-shaped.

Doing nothing doesn't make complete sense either. I've seen plenty of investors sit on the sidelines waiting for the perfect time to invest, when all of the risks subside and prices look more reasonable. Those stars rarely align and those investors often remain permanently on the sidelines, avoiding most of the risks but also most of the returns.

One of the most sensible ways to approach this conundrum is to invest your lump sum in instalments, rather than all at once. By splitting your capital into several pieces and investing it over the course of a year, or even longer, you reduce a lot of the market timing risk.

Markets tend to rise over the long-term, but along the way they move in cycles, rising and falling as the economy and investor confidence ebbs and flows. You'll end up buying some assets at high prices, but also some at much better prices. The bargain-hunter in you might even end up looking forward to some of the inevitable market corrections. KiwiSaver investors will be already using this strategy with their regular contributions, and it works.

The usual rules of keeping well-diversified still apply when you're using this approach. However, you can certainly target the markets, companies or funds that look better value first, leaving some of the more expensive elements off the shopping list until a later date. Don't be afraid to hold a little more cash than usual as you get set. The 4 per cent bank term deposit rate isn't great, but it isn't terrible either, especially when you consider where inflation is. Having a bit of dry powder is also quite useful for taking advantage of opportunities if they arise, which they always do. Be willing to pick up bargains selectively when they emerge, and build your portfolio up that way.

Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.