In short, you buy more when prices are low and buy less when prices are high.

Within the $1,000 you have committed to invest every month, a lower asset price means you purchase more of the asset, while a higher asset price means you are getting fewer units of the asset. Because you invest a fixed amount each month, you account for market fluctuations. Read more: What would the worst investor in the world do right now?īy its nature, dollar-cost averaging accounts for the state of the markets. This means that you'll have to wait longer to see positive returns, which might be lower than if you had averaged your investments on a dollar-cost basis. Just as you could invest before a period of market growth, you could also mistime the market and invest right before the market crashes. However, these potential higher returns from lump-sum investing come at a price. Source: Vanguard Investing through dollar-cost averaging appeals in a downturn This trend exists regardless of your asset allocation, be it 100% equity or 100% bonds. As you can see, dollar-cost averaging only performed better in the worst-performing three deciles (30th percentile) of all periods. If the number is positive, it means that dollar-cost averaging outperformed lump-sum investing. Note that previous market crashes, like those in 1929, 1987, 2001, and 2008, are factored into this research. It displays the performance of a classic 60/40 portfolio (60% stocks and 40% bonds) over a 12-month rolling period, with a monthly dollar-cost averaging interval. The following diagram is based on research from Vanguard. This results from a higher principal (initial invested value), leading to a greater absolute dollar value of returns. Thus, investing a lump sum over that duration will be more financially rewarding. This means that you have a higher mathematical likelihood of being better off by lump-sum investing versus dollar-cost averaging.Īs the market grows in the long run, so does the value of the assets you invest in. Markets grow over time - around 60% of monthly returns and 65% of annual returns are positive. Mathematically speaking, investing a lump sum gives you higher returns than dollar-cost averaging. Lump-sum investing refers to investing all the money you have in mind (sometimes called the total investable amount) at one go.

Lump-sum investing (LSI) is often brought up as a counterpoint to dollar-cost averaging. This makes dollar-cost averaging a good strategy for those with a low risk tolerance. As such, you're less likely to make impulsive, speculative decisions based on personal opinions or market conditions. This removes any emotional connection you have and also minimises timing risk. The routine of dollar-cost averaging also forces you to adopt a passive investment strategy. In the long run, the cumulative value of the investment will grow, boosted by the power of compounding. With dollar-cost averaging, you don't have to start with a sizeable sum. Read more: Four investing myths to debunk for budding investors The sooner you start building up an investment portfolio and the longer you stay invested, the more likely you are to reap the benefits and grow your wealth. One of the common misconceptions people have is that they want to put off investing until they have accumulated a 'large enough' nest egg. You also take less risk than lump sum investments. This will let you glean more investment experience as your income grows. This means that regardless of the state of and your opinions on the stock market, you stay committed to investing that $1,000 on the 1st of every month.įor beginner investors, dollar-cost averaging lets you start smaller from earlier on in your career, based on what you can afford. You can either have a total investment amount in mind or have an ongoing investment as a savings plan.įor example, imagine that you have decided to invest a fixed sum of $1,000 on the 1st of every month.

Dollar-cost averaging (DCA) vs lump-sum investing (LSI)ĭollar-cost averaging (DCA) refers to periodic, recurring investments of a fixed amount of money into a specific asset. In this article, we'll weigh the benefits of dollar-cost averaging versus lump-sum investing, so you can choose the most suitable investment strategy for you. But what is it exactly, and what kind of investor is it suited for? Most people recommend dollar-cost averaging as a measured way of starting to invest.

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