When you have a large amount of money available to invest, one of the first questions you may ask is whether you should invest it all at once or spread the investment out over time.
There are two common approaches to this decision: dollar-cost averaging and lump-sum investing.
Dollar-cost averaging involves investing a set amount at regular intervals, while lump-sum investing means putting the full amount to work immediately. Both approaches can be reasonable, but they involve an important tradeoff between reducing short-term uncertainty and maximizing the amount of time your money is invested.
This decision connects closely with several of the principles we have explored throughout our Investment Principles series. Time matters because of compounding. Staying invested matters because markets are difficult to predict. And periods of market volatility, while uncomfortable, are a normal part of investing.
What is Dollar-Cost Averaging?
Dollar-cost averaging is the process of investing a fixed amount of money at regular intervals rather than investing the entire amount at once.
For example, an investor with $100,000 available to invest could invest $10,000 every month for the next ten months.
The appeal is straightforward. If the market declines shortly after the initial investment, some of the remaining money can be invested at lower prices.
However, there is another side to the decision.
While that money is waiting to be invested, it is not participating in the market. That creates an opportunity cost.
The Cost of Waiting
Lump-sum investing takes the opposite approach. If an investor has $100,000 available and has already determined that the money belongs in their investment portfolio, the entire amount is invested immediately.
The advantage is simple: more of the investor’s money is working in the market for a longer period of time.
This connects directly to the Time Value of Money. A dollar invested today has more time to potentially compound than a dollar invested six months from now.
Vanguard’s research illustrates this tradeoff. Looking at historical and simulated market returns, Vanguard found that lump-sum investing outperformed a three-month cost-averaging strategy roughly two-thirds of the time. Using global equity data from 1976 through 2022, lump-sum investing produced greater wealth after one year 68% of the time.
The reason is largely the opportunity cost of leaving money in cash. Historically, diversified portfolios of stocks and bonds have generally offered higher expected returns than cash, meaning money that remains uninvested may miss out on some of the return potential available in the market.
What If the Market Falls?
This is where the decision becomes more complicated.
Imagine an investor has $100,000 available to invest. They invest the entire amount, and the market subsequently falls 15%.
An investor using a dollar-cost averaging strategy might have a better outcome during that particular period because some of their money would still be sitting in cash.
But consider the opposite scenario.
If the market rises steadily, the investor who invested the entire $100,000 participates in the entire increase, while the investor gradually investing has some money sitting on the sidelines.
This is the fundamental tradeoff.
Lump-sum investing creates greater exposure to the market immediately, which means greater potential downside but also greater potential upside. Dollar-cost averaging temporarily reduces that exposure, but it also leaves some money out of the market.
Vanguard’s simulations found the same pattern. Lump-sum investing produced higher median wealth, while dollar-cost averaging performed better in the most severe downside scenarios.
The Behavioral Side of Investing
The decision is not purely mathematical. Investor behavior matters too.
Dollar-cost averaging can make sense for investors who are highly uncomfortable with the possibility of investing a large amount immediately before a market decline. Vanguard found that while dollar-cost averaging generally produces lower expected returns, it may help highly loss-averse investors remain committed to their investment plan.
The key is having a defined plan. If an investor chooses to average into the market, the period should generally be relatively short. Vanguard found that extending the averaging period increases the opportunity cost of leaving money uninvested.
So Which Approach Is Better?
For investors who already have a large amount of cash available to invest, history generally favors lump-sum investing.
That does not mean dollar-cost averaging is wrong. If investing a large amount immediately would cause an investor to abandon their plan during a downturn or leave the money in cash indefinitely, a disciplined averaging strategy may be the better behavioral choice.
The important distinction is between temporarily delaying an investment with a defined plan and continually waiting for a better time to invest.
Final Thoughts
As with the other decisions in this series, the math points one direction, but the right path is the one you can stick with. It is also important to distinguish between investing new money as it becomes available and deliberately holding an existing lump sum in cash. Regular contributions from a paycheck are not the same as taking money that is already available to invest and choosing to wait.
Ultimately, the goal is not to find the perfect day to invest. It is to have a thoughtful plan, stick with it, and give your money the time it needs to work. Vanguard’s research reinforces that having a plan for investing cash is more important than the relatively small difference between lump-sum investing and cost averaging, particularly when compared with leaving money in cash indefinitely.
Markets will always present uncertainty, but investors do not have to navigate that uncertainty alone. At Pittenger & Anderson, we help investors develop thoughtful investment strategies, put their money to work with purpose, and maintain perspective when markets inevitably move in unexpected ways. If you are considering how or when to invest a significant amount of cash, we would be happy to help you determine an approach that aligns with your long-term goals.
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