If you’ve got it—from a work bonus, holiday gift, tax refund or other lump sum you’ve saved up—go ahead and invest it.
Vanguard did some number crunching to compare the performance of a lump-sum investment versus a dollar-cost averaging approach (or regularly investing set amounts, allowing you to buy more when prices are low and less when they’re high) over 12-month intervals between 1926 and 2015.
The results? Investing it all at once generally beats parsing it out and investing the amount slowly over time. In the U.S., the lump-sum investment—put into a 60-percent stock, 40-percent bond portfolio—performed better 68 percent of the time by an average 2.39 percent.
Why would investing all at once work better than gradually putting money into the stock market?
Going all in maximizes the time your money spends in the market—which equals more time to potentially grow and benefit from compounding (or when earnings grow on top of earnings and so on). Since the stock market tends to head upward over the long term, buying sooner rather than later also means buying at lower prices and capturing the gains.
What’s the advantage of dollar-cost averaging then?
It’s twofold: First off, we don’t always have a lump sum to invest. And investing regularly is a great way to build up our investment balances over time (instead of waiting to invest until you’ve saved up a chunk of money).
There may also be a psychological reason to use dollar-cost averaging as a strategy even when we do have a lump sum. While the general direction of the markets is up over long periods, we can expect plenty of downs along the way. And the standard volatility of investing can be a lot for some to stomach.
If you feel anxious about putting all of your money into the market at once, you may be better off dollar-cost averaging—or investing your money over time. While you may miss out on time in the market, you can benefit by scooping up more shares during the dips. Just be sure that you set up automatic contributions, so you’re not tempted to spend it instead.
So what’s the best route for me?
Think about your financial situation and investing habits. Will you need any of the cash you have on hand in case of an emergency? Are you likely to panic and sell when the market drops? Or can you be confident that you can leave this money alone for years? Your answers will help determine the best strategy for you.
January 8, 2019