Which is Better – Lump Sum Investing Vs. Dollar Cost Averaging?
Lump Sum Investing or Dollar Cost Averaging
Should you invest the money all at once or in equal chunks over time?
The latter, known as dollar cost averaging, reduces the risk of buying in when share prices are highest and about to take a dive.
That protection comes at the cost of lower returns overall as well as the risk of taking too long to invest all the money or never doing so at all.
Compared to dollar cost averaging, investing everything at once paid off 68% of the time, returning 2.39% more on average. This type of strategy produced better returns more often no
matter how the money was invested.
For some investors, dollar cost averaging may be worth sacrificing potentially higher returns from investing the money all at once.
It is recommended taking no more than a year to 18 months to invest the entire lump sum. The money should be invested in equal monthly installments according to your
portfolio’s target asset allocations.
Many brokerage firms can set up this strategy automatically over an extended period of time; moving equal amounts from a cash position (money market fund) to whatever allocation or securities you may be interested in investing.
Base your decision on the market conditions and your risk tolerance whether to invest lump sum or dollar cost averaging.
Personally, I like dollar cost averaging approach which afford me the flexibly to modify the amounts and choices if the investments turn in the wrong direction.
Daniel Iuculano AAMS CMFC
Accredited Asset Management Specialist
Chartered Mutual Fund Counselor
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