Duking it out: lump sum investing vs. dollar cost averaging



Since it’s rare that I’ve had a lump sum to invest, I’ve usually used the dollar cost averaging method of investing.

In dollar cost averaging, you invest a set amount on a regular basis, regardless of what the market is doing. For example, last year I invested $500 every month from May through December in order to fully fund my 2007 IRA. The idea behind dollar cost averaging is that you’ll buy more shares when prices are low, and fewer shares when prices are high. In other words, “on average” you might pay less per share than you would have if you’d happened to invest a lump sum when the market was way up.

Lump sum investing, on the other hand, is just what it sounds like: You take a lump sum and invest it all at once. If you happen to invest it when share prices are way down and they later go up, great! If you happen to invest it when share prices are way up and they later go down, well, not so great.

Which brings me to my (happy) dilemma. I have the opportunity to finish funding my 2008 IRA in a single lump sum, or to continue on with my original plan and fund an equal portion of it each month. But which method is best? Google pointed me to several interesting post on the subject:

Lump sum investing sounds more promising more often, but either way you’re still dealing with things relating to timing the market. (Which means I hear “never try to time the market” in my head.) But really, isn’t that exactly what people who deal in stocks for a living try to do every day? Time the market? Buy low, sell high?

With lump sum investing, of course you hope to invest when the market (or at least your target investment) is down. With dollar cost averaging, you hope to avoid timing the market by not paying attention to what it’s doing at all, but that seems a little extreme. (The market isn’t just a matter of chance.) Dollar cost averaging is used to mitigate risk, but reduced risk often means reduced return as well. At this point I am leaning towards investing using the lump sum, but I’m still not 100% sure. I guess that’s one sure thing about the market: there are no sure things.

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Posted in Savings & investments on Mar 07, 2008

7 Responses to “ Duking it out: lump sum investing vs. dollar cost averaging ”

  1. # 1 The Impecunious Investor Says:
    March 7th, 2008 at 8:06 am

    One thing to consider (and I am a very, very new investor myself so take this with a grain of salt) is that now, with the market falling, it seems like a good time to lump sum invest. Of course most people seem to think we haven’t hit bottom yet, but I would think that getting your money in now would be better than DCA over months when the market is bouncing back.

  2. # 2 Anne Says:
    March 7th, 2008 at 9:03 am

    You should consider also looking into dollar value averaging, which seems to beat both DCA and lump-sum.

  3. # 3 Mom Says:
    March 7th, 2008 at 11:29 am

    You could invest half in a lump sum now and dca the rest. Kind of a best of both worlds type of thing.

  4. # 4 The Digerati Life Says:
    March 12th, 2008 at 8:07 am

    Thanks for the info here. Technically, lump sum investing should get you better returns, but psychologically (or emotionally), DCA is a much more comfortable option for many investors, including myself. But I’m going to take a swing at LSI (lump sum investing) when I invest my business earnings into a SEP-IRA before April this year!

  5. # 5 Rick Francis Says:
    March 12th, 2008 at 2:33 pm

    There is no way to know which option is going to be better, until after it’s too late! If you have the money available now and it isn’t a huge % of your total portfolio I would go with the lump sum- especially if you have any fixed transaction costs. Use the lump sum to rebalance your portfolio- that should help prevent buying something that is relatively too high.
    If you were dealing with a huge sum of money that is a significant % of your portfolio, I would be more conservative and invest it over time. There are no guarantees you won’t put in the last investment just before a crash but your odds are much improved. Finally, each time you make an investment use it to rebalance your portfolio, rather than buying the same amounts of each asset each time.

  6. # 6 aduka Says:
    September 14th, 2008 at 7:41 am

    i want to ask you some quesstion/
    if the market are not flauate for the current situation y political isuues ,waht is the best ways to used?
    1-DCA
    2-regular saving plan
    3-money market

  7. # 7 bluntmoney Says:
    September 14th, 2008 at 9:45 am

    Aduka, I’m barely getting started with investing at all, so I’m probably not one to ask for advice. If the market was not fluctuating at all, I wouldn’t see any reason to dollar cost average IF it was between DCA & lump sum investing. But when does the market not fluctuate? I think a regular savings plan is always a good thing to have, regardless of market conditions. (Assuming you mean as opposed to a regular investing plan.) Not sure what you’re asking about money market.

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