Dollar-Cost Average? Or Lump Sum?

Vanguard looked at the question of when to invest … over time? Or all at once? * Historically, investing all at once leads to greater ending values … primarily because historically markets have gone up over the longer term.

There is a behavioral issue though that comes from the market timing part of our brains. Since the future is completely unknown, trying to time the markets would be difficult since which direction the markets go over the time frame you intend to dribble the money in (dollar cost average) would likely change directions multiple times (just look at daily closes at any given time) … and even the longer term trend would be unknown. It is this fear of the unknown that causes people to hold back from lump sum investing (what if it goes down) and even hold back from dollar cost averaging (they hesitate when it goes down).

According to the results of the study, lump sum yields better long term results. This works for inheritances for example … which tend to be already invested though. Sales of property that was not in the markets is a good example. Another good example is a bonus.

What if you don’t have a lump sum? Well you do … it is what you choose to invest for retirement or any other goal you have. It is best to invest money when you receive it, in this case monthly when you are paid, rather than save it up in savings for example and then invest that larger sum once a year. Don’ t do the later since this is confusing automatic investing (money you get monthly) with dollar cost averaging (money you got as a windfall).

Here’s an article on the choice: Dollar-Cost Averaging? Is It a Good Idea | by

* “Why Dollar-Cost Averaging Is a Lousy Retirement Investing Strategy” by Walter Updegrave (with link to Vanguard’s summary within article).

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