Should I Invest in one go?| Lump Sum Investing vs. Dollar Cost Averaging

Yes, you should. Based on Research, 2 out of 3 times investing Lump Sum immediately is better than Dollar Cost Averaging (with 2% incremental returns over a 12-month period)

Here is what you need to know about Dollar Cost Averaging and Lump Sum Investing:

  1. Vanguard research proved that it doesn’t pay to wait and try to dollar cost average
  2. However, you may try it to avoid any regrets in a downmarket
  3. Even professional investors don’t know if we are still in a bear market
  4. Only ~30% of time will this strategy work but on average you pay a price for it since cash is a drag on portfolio performance
  5. If you try to Dollar Cost Average: (i) be disciplined and (ii) don’t do over more than 12-months

Vanguard has compared outcomes in 3 countries and in each case immediate lump sum investing comes out better (68% to 70% of cases) than systematic (i.e. dollar cost averaging) with a significant 12-month portfolio outperformance:

Your Asset Allocation doesn't matter - in each scenario it's better to deploy a lump sum

lump sum investment vs dollar averagagin - timing the market asset allocation doesn't matter - time in the market is key

But should you proceed with Dollar Cost Averaging down in Coronavirus Bear Market?

As highlighted above there is over 60% chance this won’t increase your returns (are in yellow). But there is a slim chance that it will especially in a Bear Market (the area NOT in yellow)

in a bear market dollar cost averaging down can outperform lump sum investing

The case for Dollar Cost Averaging down? Regret Aversion

Note from Vanguard

Are we in a Bear Market though?

Below are the results of May 2020 Bank of America Investor survey. 68% of Professional Investors believe that we are still in a Bear Market. Read all their views here.

READ  Crash course to simplify your portfolio - 3 aspects to watch for High Impact Asset Allocation Strategies

We also show how you can Dollar Average in this market here.

asset allocation bank of america U W shaped recovery bear market rally bull market ETF finxed income
Most Fund Managers think we are still in a Bear Market - but don't take their word for it. History has proven over and over again that even professional investors are wrong (hence the rise of the Index Fund Industry)

But on average you will pay a price for it

Historical Analysis proves that on average you will pay the price for mental comfort of Dollar Cost Averaging. However if you do decide to do it, Vanguard has two important messages from their analysis:

  • Stick to the discipline and invest on a regular monthly basis over 12 months
  • Don’t spread it out over more than 12 months (you can’t beat the lump sum investment over a longer time period)

Conclusion: Research proves it pays to deploy a lump sum and put money to work straight away

lump sum investing vs dollar cost averaging: time in the market is the most important factor

Source: Vanguard

DELIVERING QUALITY GUIDES FOR YOUR FINANCIAL INDEPENDENCE

Invalid email address
Exclusive and High Quality Research you won't get anywhere else. Unsubscribe at any time.
Thanks for subscribing! Please check your email for further instructions.
Subscribe
Notify of
guest
4 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Jeremy54
Jeremy54
3 months ago

Interesting to see that even at 3k S&P level most are still skeptical

Steveark
2 months ago

I don’t think it is that simple, Happiness isn’t just about rate of return. If dollar cost averaging eases someone’s anxiety then the generally very small penalty may be well worth it.