Lump Sum Investing vs. Dollar Cost Averaging: Which Is Right for You?

When you have a large amount of cash to invest – say from a bonus, inheritance or savings you’ve been building – one of the biggest questions is:

Should you invest it all at once (lump sum investing), or spread it out over time (dollar cost averaging)?

Both are valid strategies. But depending on your financial goals, risk tolerance and current market conditions, one may serve you better than the other. Let’s break them down.

Key Takeaways

• Lump sum investing tends to outperform dollar cost averaging about 70% of the time, according to research, thanks to more time in the market.
• Dollar cost averaging spreads out risk and can ease anxiety during volatile or uncertain markets.
• The best strategy depends on your financial goals, time horizon, and how you feel about market swings.

What Is Lump Sum Investing?

Lump sum investing means putting all your available money into the market at once. The strategy aims to take full advantage of market growth right away.

Why it works: Historically, the stock market has trended upward over time. According to market research from Vanguard, lump sum investing outperformed dollar cost averaging 68% of the time, over the period of 1976-2022. That’s because the longer your money is invested, the more time it has to grow.

What Is Dollar Cost Averaging?

Dollar cost averaging (DCA) is the practice of investing smaller, equal amounts of money at regular intervals – monthly, for example – regardless of market conditions.

This method is designed to reduce the risk of investing everything just before a market downturn. Instead of trying to time the market, you invest consistently and let the highs and lows average out over time.

The case can be made that dollar cost averaging reduces emotional decision-making, especially in volatile markets. Further, it can lower the risk of buying in at a market peak while helping nervous investors ease into the market gradually.

Two Examples to Compare Lump Sum Investing vs. Dollar Cost Averaging

To help illustrate the difference between lump sum investing and dollar cost averaging, let’s walk through two simple scenarios using a $6,000 investment in a particular stock.

These examples show how different market conditions can lead to different outcomes, underscoring the importance of choosing a strategy and just getting started.

Scenario 1: A Declining Market

Imagine the year begins with a share price of $50, but the market experiences volatility and trends downward over the next six months.

If you invest the full $6,000 on January 1, you’d buy 120 shares at $50 each.
But if you instead spread your investment out by putting in $1,000 at the start of each month, you’d buy more shares as prices drop. In the end, you might own about 122 shares at an average price of $48.

In this scenario, dollar cost averaging comes out ahead, since it takes advantage of falling prices and nets you more shares.

Scenario 2: A Rising Market

Now consider the opposite: the market starts at $50 per share and steadily climbs over the next six months.

With a lump sum investment on January 1, you again buy 120 shares at $50.
But with dollar cost averaging, your later purchases happen at higher prices, so you end up with about 118 shares at an average price of $51.

In this case, lump sum investing performs better because it puts all your money to work earlier in a rising market.

What the Research Says

While dollar cost averaging may help reduce regret and manage emotional risk, the math favors lump sum investing more often than not.

Another Vanguard study showed that in markets like the U.S., U.K. and Australia, lump sum investing beat dollar cost averaging about two-thirds of the time, over a 10-year period, and in a variety of different stock/bond allocations.

If you're a numbers person and want to take the approach that gives you the best chance of having more money, then according to this study, lump sum investing might be your best approach. 

When Dollar Cost Averaging Might Make Sense

Even though the math favors lump sum investing, there are times when dollar cost averaging is the better behavioral choice:

• You're nervous about market volatility
• You're investing a large windfall and want to reduce regret
• You’re easing into investing for the first time, such as with 401(k) contributions

In those cases, dollar cost averaging can act as a psychological safety net, helping you stick with your plan without second-guessing each market dip.

The Bottom Line

Lump sum investing is generally the more favorable financial choice. But dollar cost averaging can be a better emotional one for some investors, especially during volatile times or when you’re feeling anxious about market timing.

If you’re unsure what to do, talk with an Advance Capital adviser. We can help you weigh the trade-offs, build a strategy that matches your comfort level and help put your money to work – whether all at once or over time.