Should I Invest in one go?| Lump Sum Investing vs. Dollar Cost Averaging

June 25, 2020 Raph Antoine Browse All Our Insights, FAQ - How to Invest In Index Funds, Portfolio Construction 4

Yes, you should. Based on Research, 2 out of 3 times investing Lump Sum immediately is better than Dollar Cost Averaging (with 2% incremental returns over a 12-month period)

Here is what you need to know about Dollar Cost Averaging and Lump Sum Investing:

  1. Vanguard research proved that it doesn’t pay to wait and try to dollar cost average
  2. However, you may try it to avoid any regrets in a downmarket
  3. Even professional investors don’t know if we are still in a bear market
  4. Only ~30% of time will this strategy work but on average you pay a price for it since cash is a drag on portfolio performance
  5. If you try to Dollar Cost Average: (i) be disciplined and (ii) don’t do over more than 12-months

Vanguard has compared outcomes in 3 countries and in each case immediate lump sum investing comes out better (68% to 70% of cases) than systematic (i.e. dollar cost averaging) with a significant 12-month portfolio outperformance:

Your Asset Allocation doesn't matter - in each scenario it's better to deploy a lump sum

lump sum investment vs dollar averagagin - timing the market asset allocation doesn't matter - time in the market is key

But should you proceed with Dollar Cost Averaging down in Coronavirus Bear Market?

As highlighted above there is over 60% chance this won’t increase your returns (are in yellow). But there is a slim chance that it will especially in a Bear Market (the area NOT in yellow)

in a bear market dollar cost averaging down can outperform lump sum investing

The case for Dollar Cost Averaging down? Regret Aversion

Note from Vanguard

Are we in a Bear Market though?

Below are the results of May 2020 Bank of America Investor survey. 68% of Professional Investors believe that we are still in a Bear Market. Read all their views here.

We also show how you can Dollar Average in this market here.

asset allocation bank of america U W shaped recovery bear market rally bull market ETF finxed income
Most Fund Managers think we are still in a Bear Market - but don't take their word for it. History has proven over and over again that even professional investors are wrong (hence the rise of the Index Fund Industry)

But on average you will pay a price for it

Historical Analysis proves that on average you will pay the price for mental comfort of Dollar Cost Averaging. However if you do decide to do it, Vanguard has two important messages from their analysis:

  • Stick to the discipline and invest on a regular monthly basis over 12 months
  • Don’t spread it out over more than 12 months (you can’t beat the lump sum investment over a longer time period)

Conclusion: Research proves it pays to deploy a lump sum and put money to work straight away

lump sum investing vs dollar cost averaging: time in the market is the most important factor

Source: Vanguard

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About Raph Antoine 77 Articles
Raph Antoine is a Portfolio Manager and Institutional Advisor that witnessed first-hand the 2008 Global Financial Crisis and the 2011 European Debt Crisis working for some of the most prestigious names in the financial industry. Raph has experience across multiple asset classes including Fixed Income and Equity products as well as bespoke Investment vehicles in multiple jurisdictions. Raph holds an MSc in Financial Engineering and is a CFA (Chartered Financial Analyst) Charterholder. He usually rides one of his two bikes. Rarely, a Canyon Ultimate CF SLX 8.0 (that is currently in family's attic) and most of the time a Gravel Pinnacle Arkose (his favorite) that he used to Cycle the World.
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Jeremy54
Jeremy54
1 year ago

Interesting to see that even at 3k S&P level most are still skeptical

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Raph Antoine
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Raph Antoine (@contactbankeronwheels-com)
1 year ago
Reply to  Jeremy54

Hi Jeremy,

Indeed – There will be some client pressure and FOMO I expect if a second leg down doesn’t materialize

Best,

Raph

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Steveark
Steveark
1 year ago

I don’t think it is that simple, Happiness isn’t just about rate of return. If dollar cost averaging eases someone’s anxiety then the generally very small penalty may be well worth it.

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Raph Antoine
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Raph Antoine (@contactbankeronwheels-com)
1 year ago
Reply to  Steveark

This tackled the problem from an academic perspective (and it’s also Vanguard’s research so they will have incentive for you to invest asap). That said, my personal preference is to have a buffer to profit from major sell-offs, conceptually described here:
https://bankeronwheels.com/covid-19-how-to-start-investing-for-long-term-returns-implementation/

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