Lump-Sum Investing Vs. Dollar Cost Averaging

Which is Better Lump-Sum Investing or Dollar Cost Averaging?

Dollar Cost Averaging – theory is over time if you spread out your investments you will automatically buy fewer shares when the shares are high and more when shares are priced lower during market pull-backs and corrections.

If you invest lump sum and the market takes a dive, you will find yourself taking a loss that might be several years before it turns around or might stop out if you have stop loss targets in place.

You might be in a lump sum situation if you sold a large position, inherited a large sum of money or assets or a work bonus. Which one of the above strategies should you pick?

That will depend on how much risk you are willing to a assume, the momentum of the current market conditions, how volatile the market is and the sum of money in question.

During strong bull markets with headwinds heading upward, the reasonable choice might be lump-sum, however in volatile markets like what we are experiencing today, neutral or bearish markets then the dollar cost averaging is the better choice.

Keep in mind historically going back decades, the market has gone up far more often than it has fallen.

However, if you wish to be a bit more conservative (less risk) chose dollar cost averaging over numerous months; the larger the lump sum the longer you can go out before being fully invested.

I generally wait until there is a pull back on any given day and purchase that day to lower my costs.

If you should decide to invest lump Sum; you should apply an allocation between stocks, bonds, liquid and other alternative investments.

For example – if your overall allocation plan is 60 % stock and 40 % in bonds, you can split a lump sum into the same manner over several different securities to divide your risk over multiple stocks and bonds or other fixed income securities.


Daniel F. Iuculano, AAMS CMFC

Accredited Asset Management Specialist

Chartered Mutual Fund Counselor

 

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