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Investment Strategy

Should you take the plunge? Discover the benefits and trade-offs of phasing into markets

It’s a hot summer day. Standing at the pool’s edge, you feel torn between excitement and hesitation. The shimmering water looks inviting, but you worry about the 20-degree temperature differential between the water and air. Should you dive right in, or ease in gradually? 

At the pool, this decision is low stakes. But with your investments, it’s pivotal.

When choosing how to invest money for the long term, you can either jump into markets all at once with lump-sum investing, or use a slower, systematic process known as “phasing in” or dollar-cost averaging. It’s important to consider the trade-offs of each. In this article, we assess various strategies for phasing into stocks and bonds and compare historical outcomes across different market environments.

The key is to balance the risk of a near-term market drawdown with the risk of missing out on potential upside by delaying your investment plan for too long. As our analysis shows, lump-sum investing may offer higher total expected returns, but phasing into markets narrows the range of possible performance outcomes, reducing volatility. 

Whether you choose to dive into markets quickly or take it slow, what’s most important is enhancing your ability to stay invested. Here, we take a closer look at how to optimize entry timing. 

Evaluating the trade-off: Lump sum versus “phased-in” investing

The merits of long-term investing in stocks and bonds are clear: Historically, over 10-year rolling periods, a traditional 60/40 stock-bond allocation1 has delivered positive returns 100% of the time since 1990, with an average 10-year return of 119%.2 But the most nerve-racking part of getting into markets is the risk of experiencing short-term volatility.

It's important to remember that you will never be able to time the market perfectly. Historically, there is a 94% chance that an initial investment in the S&P 500 will be lower in value at some point even though the index has delivered an average annual return of 9.5% since 1928. And as you extend your time horizon, the chances of being “in the green” potentially increase. 

But it’s also likely your investments will decline in value at some point, and this is where “phasing in” can help. This calendar-based, systematic approach aims to smooth out market entry points, limiting the effects of potential near-term market drawdowns while preserving the potential to capture upside.

The most common method of “phasing in” deploys cash to a specific asset class on a predetermined schedule, akin to paying rent each month. During a typical phase-in process, investors hold uninvested capital in cash or short-term investment vehicles, such as money market funds, to earn additional yield while waiting to move funds into their chosen long-term strategy. 

The effectiveness of this approach can be seen below. This chart illustrates the historical results of phased-in approaches over different time periods for a hypothetical investor deploying capital to a 60/40 allocation. A three-tranche phase-in involves investing a third of the cash in equal increments over approximately two months.3 The same pattern applies to the six-tranche and 12-tranche approaches, with increments invested over periods of five and 11 months, respectively. 

Phasing into investments can help reduce potential return volatility

Return outcome ranges for a model 60/40 allocation (phased in vs. lump sum)

Chart comparing investment returns of a phase-in strategy versus a lump-sum approach. A 6-tranche monthly phase-in shows a 1.3% lower median return but reduces downside by 2.3%. Longer phase-in periods further decrease both median return and return variability. Phase-in outperformed lump-sum 37% of the time for 3 tranches, 34% for 6 tranches, and 31% for 12 tranches.
Source: J.P. Morgan, Bloomberg Finance L.P. As of 6/30/2024. Performance calculated using index returns for an allocation of 60% S&P 500 / 40% Bloomberg US Aggregate Index, rebalanced quarterly. While phasing-in, excess cash is assumed to be invested in 1-3-month T-Bills. Back test begins on 12/31/1989, which is the extent of historical daily return data for the Bloomberg US Aggregate Index. Range shown is range of 5th to 95th percentile of observations, and middle line is median observation.

Unsurprisingly, the lump-sum investment approach for our model 60/40 allocation yields the highest median return of 10.0%. Since markets tend to go up over time, being fully invested for longer has been the most profitable choice, on average. However, the range of return outcomes for the lump-sum strategy remains the widest of all our scenarios, ranging from 24.0% to -9.8%. Again, this dynamic clearly demonstrates the trade-off: Compared to investing everything at once, a phased-in approach can narrow the range of potential return outcomes, even though it may lower your median return slightly. 

How long should you take to phase in? 

Over longer time horizons, the effects of the phase-in strategy type start to fade. Looking at annualized returns over three years, for example, the median return and range of outcomes for the 3-, 6- and 12-tranche options converge with those of the lump sum approach. However, extending the phase-in process too long—up to two years and 24 tranches, as shown below—leads to lower returns. 

Extending the phasing-in process can become counterproductive

Range of potential returns for a 60/40 phased-in model allocation

Chart comparing a 6-tranche monthly phase-in strategy to a lump-sum approach. The phase-in strategy reduces the median return by 0.3% annually while maintaining the same downside outcome. Extending the phase-in period beyond 2 years lowers the median return without enhancing downside protection. Phase-in outperformed lump-sum 37% of the time for 3 tranches, 35% for 6 tranches, 31% for 12 tranches, and 25% for 24 tranches.
Source: J.P. Morgan, Bloomberg Finance L.P. As of 6/30/2024. Performance calculated using index returns for an allocation of 60% S&P 500 / 40% Bloomberg US Aggregate Index, rebalanced quarterly. While phasing-in, excess cash is assumed to be invested in 1-3-month T-Bills. Back test begins on 12/31/1989, which is the extent of historical daily return data for the Bloomberg US Aggregate Index. Range shown is range of 5th to 95th percentile of observations, and middle line is median observation. Past performance is no guarantee of future results. It is not possible to invest in an index.

To balance the trade-off between upside return capture and downside risk avoidance, using a phase-in period of no more than six tranches would seem to offer the best potential outcome.

Adjusting your strategy to market expectations

So far, our analysis has covered a broad range of market environments. But what should you do if you expect a large equity market drawdown? To explore the impact of such drawdowns, we reran the scenarios, focusing on historical periods in which the S&P 500 experienced declines of varying magnitude in the first 100 trading days after the initial investment was made. 

In our first drawdown scenario of -5% to -10%, which occurred in 17% of the periods we analyzed, median returns for the lump-sum and three- and six-tranche phase-in approaches were similar (8.3%–8.4%). However, the 12-tranche approach had significantly lower median returns, as markets often recovered before all 12 tranches could be invested. 

In the second drawdown scenario of -10% to -20%, which occurred in 13% of the periods, median returns were positive across all approaches. Notably, all phase-in approaches outperformed the lump-sum strategy, with the six-tranche approach achieving the highest and best rate of outperformance: 92% versus the lump sum.

In the -20%-plus drawdown scenario—a traditional bear market that occurred in just 5% of the periods we analyzed—the lump-sum median return turned negative for the first time. However, all phase-in approaches remained positive, as shown below.

In a steep market drawdown, phasing in may provide resilience

Range of returns for a 60/40 allocation post-20% drawdown

Chart showing that a 10-20% drawdown occurred in 13% of periods. Median returns for all phase-in strategies exceeded those of the lump-sum approach, as phase-in lowered average costs during drawdowns. The 6-tranche strategy had the highest median return at 7.6% and outperformed the lump-sum approach 92% of the time. Phase-in outperformed lump-sum 82% for 3 tranches, 92% for 6 tranches, and 81% for 12 tranches.
Source: J.P. Morgan, Bloomberg Finance L.P. As of 6/30/2024. Performance calculated using index returns for an allocation of 60% S&P 500 / 40% Bloomberg US Aggregate Index, rebalanced quarterly. While phasing-in, excess cash is assumed to be invested in 1-3-month T-Bills. Back test begins on 12/31/1989, which is the extent of historical daily return data for the Bloomberg US Aggregate Index. Range shown is range of 5th to 95th percentile of observations, and middle line is median observation. Past performance is no guarantee of future results. It is not possible to invest in an index.

Comparing different phase-in styles

While phasing-in approaches may be optimal if markets decline by 10% or more in the first few months after you invest, it's impossible to know beforehand if this will occur. So what approaches should you consider if you have a bearish near-term equity market view? These two alternatives may be worth considering:

Fixed income first: If you’re investing in a multi-asset portfolio, you could phase into fixed income first. Below, we compare a standard six-tranche approach to a six-tranche approach that starts out by fully deploying cash into bonds (in the first three tranches), followed by cash to equities (in the final three tranches). 

Using a “fixed income first” approach may help if markets fall sharply

Range of returns for a 60/40 model allocation versus deploying cash to fixed income first

Chart indicating that a bear market, defined as a 20% or greater drawdown, occurred in 5% of periods. In these scenarios, the "fixed income first" approach achieved the highest median return and limited downside. Overall, it had a better median return than the 12-tranche approach (7.7% vs. 6.9%) with a similar lump-sum outperformance rate (33% vs. 31%). Phase-in outperformed lump-sum 88% for 3 tranches, 96% for 6 tranches, 92% for 6 tranches with "fixed income first," and 87% for 12 tranches.
Source: J.P. Morgan, Bloomberg Finance L.P. As of 6/30/2024. Performance calculated using index returns for an allocation of 60% S&P 500 / 40% Bloomberg US Aggregate Index, rebalanced quarterly. While phasing-in, excess cash is assumed to be invested in 1-3-month T-Bills. Back test begins on 12/31/1989, which is the extent of historical daily return data for the Bloomberg US Aggregate Index. Range shown is range of 5th to 95th percentile of observations, and middle line is median observation. . Past performance is no guarantee of future results. It is not possible to invest in an index.

In a -20%-plus drawdown scenario, as shown, taking a “fixed income first” approach results in better median returns than a 12-tranche phase-in while still limiting downside.

But what if markets don’t actually fall by 20% or more? Over all time periods, the six-month “fixed income first” approach had a better median return than the 12-tranche phase-in strategy (7.7% versus 6.9%) and a stronger lump-sum outperformance rate (33% vs. 31%). In our view, taking a “fixed income first” approach offers investors a preferable middle ground than extending allocations to 12 tranches.

Taking a “fixed income first” approach can also help mitigate potential downside risk

Range of returns for a 60/40 model allocation versus a “fixed income first” approach (over all time periods)

Chart showing a 6-tranche phase-in strategy reduced the median return by 1.3% compared to a lump-sum approach, while decreasing downside by 2.3%. Longer phase-in periods further reduce both median return and return variability. Phase-in outperformed lump-sum 37% for 3 tranches, 34% for 6 tranches, and 31% for 12 tranches.
Source: J.P. Morgan, Bloomberg Finance L.P. As of 6/30/2024. Performance calculated using index returns for an allocation of 60% S&P 500 / 40% Bloomberg US Aggregate Index, rebalanced quarterly. While phasing-in, excess cash is assumed to be invested in 1-3-month T-Bills. Back test begins on 12/31/1989, which is the extent of historical daily return data for the Bloomberg US Aggregate Index. Range shown is range of 5th to 95th percentile of observations, and middle line is median observation. Past performance is no guarantee of future results. It is not possible to invest in an index
Investor led: Some investors may prefer to take a discretionary approach to speed up or slow down their investment schedule based on market conditions. One common investor-led approach involves accelerating a standard, calendar-based phase-in approach if markets suddenly decline. Below, we compare a basic six-month calendar-based phase-in strategy with a six-month calendar-based approach that accelerates cash deployment as soon as the S&P 500 falls by 5%.

Taking an investor-led approach, based on market moves, confers no advantage

Range of returns for a 60/40 model allocation invested after +5%/-5% market moves

 Chart showing similar results for accelerating after a -5% drawdown or a 5% rally, with comparable median returns and downside risks. Phase-in outperformed lump-sum 34% for 6 tranches, 35% for 6 tranches accelerated at -5%, and 34% for 6 tranches accelerated at +5%.
Source: J.P. Morgan, Bloomberg Finance L.P. As of 6/30/2024. Performance calculated using index returns for an allocation of 60% S&P 500 / 40% Bloomberg US Aggregate Index, rebalanced quarterly. While phasing-in, excess cash is assumed to be invested in 1-3-month T-Bills. Back test begins on 12/31/1989, which is the extent of historical daily return data for the Bloomberg US Aggregate Index. Range shown is range of 5th to 95th percentile of observations, and middle line is median observation. Past performance is no guarantee of future results. It is not possible to invest in an index.

In our analysis, median returns were identical. Although it may feel better to invest quickly in the wake of a drawdown, market returns gained by taking this approach do not differ significantly from long-term averages. Past returns have little correlation to future returns, especially in the near term.

Conclusion: Balancing caution and speed 

Our analysis clearly supports the familiar adage that time in the markets leads to higher returns than timing the market. Investing all at once may lead to higher returns, but it is also a likely to result in a wider range of outcomes than phasing in. 

If your first priority is to lower your portfolio’s range of return outcomes, you might want to consider using a calendar-based phase-in approach with six monthly tranches—or less. This approach can help reduce drawdown risk while ensuring that your portfolio allocation is invested quickly enough to benefit from potential future returns.

If you are especially nervous about the direction of equity markets, phasing-in with fixed income first might be an option to consider. This approach can help reduce drawdown risk while ensuring that your portfolio allocation will be invested quickly enough to capture potential upside in the near future.

Re-entering markets with confidence

As you contemplate stepping back into markets, it's natural to feel apprehensive about short-term investment volatility. However, staying on the sidelines indefinitely can mean missing out on potential long-term gains. Systematically phasing into markets can help mitigate risks and smooth returns, allowing you to gradually build your portfolio allocation while managing volatility.

Our analysis clearly supports the familiar adage that, historically, time in the markets has lead to higher returns than timing the market.

Reach out to J.P. Morgan today to discuss strategies for reinvesting cash and working towards your financial goals

1For purposes of analysis, our 60/40 stock-bond model represents allocations of 60% to U.S. equities and 40% to U.S. bonds.

2Source: J.P. Morgan, Bloomberg Finance L.P. As of 6/30/2024. Performance calculated using index returns for an allocation of 60% S&P 500 / 40% Bloomberg US Aggregate Index, rebalanced quarterly. While phasing-in, excess cash is assumed to be invested in 1-3-month T-Bills. Back test begins on 12/31/1989, which is the extent of historical daily return data for the Bloomberg US Aggregate Index. Range shown is range of 5th to 95th percentile of observations, and middle line is median observation.

3For example, investing one third on January 1, one third on February 1, and one third on March 1.

Taking a gradual approach to adding long-term equity exposure—known as phasing in, or dollar-cost averaging—can help reduce overall portfolio volatility.

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