Dollar Cost Averaging vs. Lump Sum Investing - SmartAsset (2024)

If you want to dip your toe into investing, it can be overwhelming. The terminology, risks and fees might make you want to just dump your funds in a savings account instead. But that would be a mistake – investing can be a great way to grow your assets over time and with the right strategy you can mitigate risks and maximize returns. Let’s take a look at two common investment strategies to see which one is right for you. If you want expert advice before you take any further steps, consider speaking to a financial advisor to create a personalized investment plan.

What Is Dollar-Cost Averaging?

According to FINRA, dollar-cost averaging is an investing strategy where you break up your funds into portions and invest one portion at a time. For example, if you have $5,000 you’d like to invest, instead of investing all $5,000 at once, you could invest $1,000 at a time on a set schedule.

Using this strategy, you might put $1,000 in investments each month for five months. As the market rises and falls over that period, some months $1,000 might buy more shares and some months it might buy less.

Dollar-cost averaging allows you to invest steadily while lowering your overall risk. It can also help you establish the habit of investing without falling prey to the impulse to game the market—that is, try to predict the exact right moment to invest.

What Is Lump Sum Investing?

Lump sum investing is essentially the opposite of dollar-cost averaging. In the above scenario, you have $5,000 and invest it slowly, month by month. If you instead use the lump sum method, you would immediately invest all $5,000—no breaking it up and investing it over time.

While dollar-cost averaging might make risk lower and more palatable, lump sum investing can provide larger returns. It gives your investments more exposure—meaning you have more to gain if the markets rise. Of course, that also means you have more to lose if markets fall.

What Are the Pros and Cons of Each?

As you may have already noticed, there are upsides and downsides to both strategies. Here are some of the more important considerations.

Dollar-Cost Averaging

  • By taking a slow and steady approach, you may be able to invest less emotionally. Since you’re establishing an investment habit regardless of the economic climate, you may be able to sidestep some of the common emotional mistakes investors often make.
  • This strategy does help mitigate risk. Since you’re investing over time, the specifics of the market on any particular day aren’t as impactful as they might be when lump sum investing.
  • On the negative side, while dollar-cost averaging can mitigate risk and allow you to pay lower average share prices over time, you could also see lower returns than you would with lump sum investing. Say you decide to invest $1,000 a month from January to May—in February the market goes up. If you had invested all $5,000 in January, you would have seen higher returns. Now, your $1,000 won’t go as far.
  • Depending on how you’re investing, the dollar-cost approach might cause you to rack up more brokerage fees that can eat into your returns.
  • Finally, if you invest $1,000 and leave the remaining $4,000 in your account to invest later, you might be tempted to spend that $4,000 on something else rather than invest it. If you take the dollar-cost averaging approach, make sure you’re committed and don’t touch the money you intend to invest.

Lump Sum Investing

  • When you put all your money in at once, you’re more likely to see results quickly. This can be a helpful motivator for a beginning investor.
  • You will often see higher returns with lump sum investing compared to dollar-cost averaging.
  • Ever heard of the relationship between risk and reward when it comes to investments? On the downside, the likelihood of higher reward also comes with higher risk.
  • You’ll need to manage the emotional aspect of investing as you watch the market rise and fall. Remember that impulse to game the market? You might begin to think that you can pull your money out or put it in at exactly the right time, but that’s highly unlikely. You’ll need to develop nerves of steel and let your portfolio ebb and flow with the economy.
  • Lump-sum investing doesn’t build a good financial habits in the same way that lump-sum investing does. Even if you decided this strategy is right for you, make sure you’re continuing to invest going forward.

Which One Is Right for You?

Dollar-cost averaging can be a great strategy for a beginning investor who wants to get in the habit of steadily growing their portfolio. It’s lower risk and can help take some of the emotional swings out of investing. On the negative side, dollar-cost averaging can generate lower returns and generate higher brokerage fees that diminish your bottom line.

Lump sum investing is a good choice for those who can manage the emotional impulse to game the market and are confident they can build good investing habits going forward. This strategy will likely generate higher returns, though it also comes with higher risks.

The Bottom Line

Comparing dollar-cost averaging to lump sum investing can be a fruitful exercise to help you find the right strategy for you. Both investment methods have positives and negatives. You can use the information above to help you determine which one is right for you and how each method will fit into your overall investment strategy going forward.

Tips for Investing

  • Learning to invest can be challenging but a financial advisor can help simplify the process for you. Finding a financial advisor doesn’t have to be hard.SmartAsset’s matching tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • A diverse investment portfolio can help you mitigate the inherent risks of the market. Use SmartAsset’s asset allocation calculator to find the right mix of investments for you.

Photo credit: © Meepian, © Meepian, © Phaisitsawan

Dollar Cost Averaging vs. Lump Sum Investing - SmartAsset (2024)


Dollar Cost Averaging vs. Lump Sum Investing - SmartAsset? ›

Lump sum investing is essentially the opposite of dollar-cost averaging. In the above scenario, you have $5,000 and invest it slowly, month by month. If you instead use the lump sum method, you would immediately invest all $5,000—no breaking it up and investing it over time.

Is dollar-cost averaging better than lump sum investing? ›

Lump-sum investing may generate slightly higher annualized returns than dollar-cost averaging as a general rule. However, dollar-cost averaging reduces initial timing risk, which may appeal to investors seeking to minimize potential short-term losses and 'regret risk'.

What are the 2 drawbacks to dollar-cost averaging? ›

Cons of Dollar Cost Averaging
  • You Could Miss Out on Certain Opportunities. Investing in the same stock or fund every month could cause you to miss out on other investment opportunities. ...
  • The Market Rises Over Time. ...
  • It Could Give You a False Sense of Security.
Sep 12, 2023

What is the best investment for $100,000? ›

6 approaches and strategies to invest $100,000
  • Park your cash in an interest-bearing savings account.
  • Max out contributions to retirement accounts.
  • Invest in ETFs.
  • Buy bonds.
  • Consider alternative investments.
  • Invest in real estate.
Apr 3, 2024

Are earnings taxed in dollar-cost averaging? ›

Capital gains and dividends are taxed differently than earned income—and if you're just dollar-cost averaging into an account and not selling anything, you won't pay any taxes on the capital gains.

Why is lump sum better than dollar-cost averaging? ›

Some analysis suggests that dollar-cost averaging is approximately equivalent to an asset allocation where only 50 to 65 per cent of the portfolio is invested in risky assets and the rest in riskless assets – such as treasury bills – is still suboptimal compared with a lump sum investment into a portfolio with those ...

Why I don t like dollar-cost averaging? ›

One disadvantage of dollar-cost averaging is that the market tends to go up over time. Thus, investing a lump sum earlier is likely to do better than investing smaller amounts over a long period of time.

Why do you think dollar-cost averaging reduces investor regret? ›

Dollar-cost averaging makes it easier to stick to the plan

In hindsight, after the market has recovered, investors often regret not taking advantage of what they now know to be a great buying opportunity.

How often should you invest with dollar-cost averaging? ›

Consistency trumps timing

It sounds technical, but dollar cost averaging is quite simple: you invest a consistent amount, week after week, month after month (think payroll contributions going into your 401(k) account) regardless of whether the markets are up, down or sideways.

Is it better to invest all at once or monthly? ›

Lump-sum investing is usually the better choice

There has been plenty of research done on this subject, so we have an answer on which investment strategy is better. Lump-sum investing outperforms dollar-cost averaging about two-thirds (68%) of the time, according to Vanguard.

How can I turn $100 000 into a million? ›

If you keep saving, you can get there even faster. If you invest just $500 per month into the fund on top of the initial $100,000, you'll get there in less than 20 years on average. Adding $1,000 per month will get you to $1 million within 17 years. There are a lot of great S&P 500 index funds.

How can I double 100k in a year? ›

Doubling money would require investment into individual stocks, options, cryptocurrency, or high-risk projects. Individual stock investments carry greater risk than diversification over a basket of stocks such as a sector or an index fund.

How can I turn $10000 into $100000? ›

To potentially turn $10k into $100k, consider investments in established businesses, real estate, index funds, mutual funds, dividend stocks, or cryptocurrencies. High-risk, high-reward options like cryptocurrencies and peer-to-peer lending could accelerate returns but also carry greater risks.

What is the best dollar-cost averaging strategy? ›

The strategy couldn't be simpler. Invest the same amount of money in the same stock or mutual fund at regular intervals, say monthly. Ignore the fluctuations in the price of your investment. Whether it's up or down, you're putting the same amount of money into it.

What is reverse dollar-cost averaging? ›

If investments are being sold on a regular basis to fund your retirement lifestyle, reverse dollar-cost averaging takes place and forces you to sell your investments regardless of the price per share.

Is DCA the best strategy? ›

A third of the time, dollar cost averaging outperformed lump sum investing. Because it's impossible to predict future market drops, dollar cost averaging offers solid returns while reducing the risk you end up in the 33.33% of cases where lump sum investing falters.

Is dollar-cost averaging riskier than lump sum investing? ›

Investing all at once through lump-sum investing can mean higher returns, so choose this method if your primary concern is performance. But dollar cost averaging can help you gradually increase your exposure to risk over time, which can help you lower stress and avoid regret.

Is dollar-cost averaging riskier than lump sum? ›

A Lump Sum investment into a 60/40 (stock/bond) portfolio has the same level of risk as Dollar Cost Averaging into the S&P 500 over 24 months, yet the Lump Sum investment is more likely to outperform!

Do lump sum investing strategies really outperform dollar-cost averaging strategies? ›

In short, the literature either shows that LS outperforms DCA in uptrend markets or DCA outperforms LS only when the underlying asset prices follow a mean-reverting process or when the markets are trending downward. As far as we know, there is no study showing that DCA outperforms LS during an uptrend market.

Is dollar-cost averaging the best way to invest? ›

Dollar cost averaging is the practice of investing a fixed dollar amount on a regular basis, regardless of the share price. It's a good way to develop a disciplined investing habit, be more efficient in how you invest and potentially lower your stress level—as well as your costs.

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