Lump sum investing
Lump sum investing deals with what action to take when you receive a windfall due to an inheritance, bonus payment, or sale of a small business. How should you invest the cash? Would you immediately invest all of it as a lump sum? Or would you make a series of investments over time, a strategy known as dollar cost averaging (DCA), to avoid the risk of investing the entire amount right before a market downturn?[1]
The short answer is lump sum investing is the better choice about two-thirds of the time. DCA does offer some behavioural benefits to minimize downside risk and feelings of regret.
Why choose to lump sum invest
The main reason to invest all of it as a lump sum is you gain exposure to the markets as soon as possible and historical market trends indicate that stocks and bonds returns exceed returns on cash investments.
Why not lump sum invest
The main reason to choose not to lump sum invest is if the investor is primarily concerned with minimizing downside risk and potential feelings of regret (resulting from lump-sum investing immediately before a market downturn), then DCA may be of use.
Study results
A variety of studies[2][3] have covered the lump sum versus cost averaging question and generally they come to the following conclusions.
- Lump sum investment strategies beat common cost averaging investment strategies two-thirds of the time, according to historical and simulated market data.
- Despite the expectation of lower returns, cost averaging might be considered for investors with very high aversion to both risk and losses who might be tempted to hold a lump sum entirely in cash.
See also
References
- ^ "Lump-sum investing versus cost averaging: Which is better?". Vanguard. April 21, 2023. Retrieved 2025-01-16.
- ^ Finlay, Megan; Zorn, Josef (February 2023). "Cost averaging: Invest now or temporarily hold your cash?" (PDF). Vanguard research.
- ^ Lauricella, Tom (November 26, 2019). "Dollar-cost averaging vs. lump-sum investing". Morningstar Canada. Retrieved 2025-01-16.
Further reading
- Financial Wisdom Forum topic: "DCA or lump sum?"
- Financial Wisdom Forum topic: "Lumpsum going to Canadian Equities: DCA or all in, or?"
- Financial Wisdom Forum topic: "How to invest a lump sum"
External links
- Felix, Benjamin (January 18, 2024). "Why lump-sum investing beats dollar-cost averaging". The Globe and Mail.
- "How to invest a lump sum of money". Vanguard Personal investors.
- Saldanha, Ruth (November 21, 2019). "Dollar cost averaging doesn't work". Morningstar Canada.
- Shtekhman A, Tasopoulos C, Wimmer B (2012) Dollar-cost averaging just means taking risk later, Vanguard Research Paper, viewed August 31, 2017.