If you have some money saved, and you're ready to get started with investing, you'll face a common dilemma. You could invest that money all at once. This is known as lump-sum investing, and it gets you fully invested right away.
Or, you could invest that money in fixed increments. Instead of putting $3,000 into the market immediately, maybe you invest $1,000 a month. This is known as dollar-cost averaging.
New investors often wrestle with this decision. Neither option is a bad choice, but there is one that tends to perform better.
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.
Vanguard measured results for each strategy using market data from 1976 through 2022. It compared one-year returns on a hypothetical $100,000 investment. Money was either fully invested from the beginning (for the lump-sum method) or over the first three months (for dollar-cost averaging). It ran 10,000 scenarios, using different asset allocations and time periods.
Vanguard found that "in most historical market environments, investors would have been better off investing the lump sum all at once." This method outperformed dollar-cost averaging by a median of 1.2% to 2.2%, depending on asset allocation.
Dollar-cost averaging is a good alternative if you're risk-averse
Even though lump-sum investing generally works out better, there is a valid reason to go with dollar-cost averaging.
Imagine that you've saved up $10,000, and you invest it all. Then, the market goes into a freefall. It loses 10% over the next few months, and your portfolio is now worth $9,000. Do you panic, constantly check your brokerage account, and consider cutting your losses? Or do you remain calm and remember that historically, the market has always recovered?
If the thought of losing money terrifies you, then you may want to go with dollar-cost averaging. The advantage with this method is that you're more likely to avoid big losses. Even if the market declines after you invest, you haven't invested all your money yet. You'll still have cash you can use to invest at a lower price while the market is down.
Dollar-cost averaging is also a good choice after you've gotten your initial money invested. Investing shouldn't be a one-time thing. To get the best results, it's important to make investing a habit. Since dollar-cost averaging is simply investing a set amount regularly, it's a great long-term strategy. You can likely set up automatic investments through your brokerage or retirement accounts so you don't need to remember to do it.
There's no wrong answer
Lump-sum investing and dollar-cost averaging are both good strategies when starting out as an investor. The difference in performance isn't significant enough to make either the clear best choice, so pick whichever you're comfortable using. The fact you're investing is what's most important, not the method you choose.
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FAQs
A 2021 Northwestern Mutual Life study showed that investing a lump sum generally outperforms dollar-cost averaging over various periods of time. Just keep in mind that this is based on past historical performance, so it doesn't necessarily mean this will remain the case in the future.
Is it better to invest all at once or over time? ›
As a new investor, you can either invest your money all at once as a lump sum or invest it over time, which is called dollar-cost averaging. Research by Vanguard has found that lump-sum investing outperforms dollar-cost averaging 68% of the time.
Should I put all my money in stocks at once? ›
The right ratio for you will depend on your risk tolerance. Even if it sounds extreme, a 100% stock portfolio can be a great choice for investors who don't mind the volatility and have plenty of time until retirement. Just make sure you have a diversified stock portfolio with a large number of companies.
Should I invest all my spare money? ›
Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.
What is the smartest thing to do with a lump sum of money? ›
Build emergency savings
However you choose to invest your lump sum, it may also be a good idea to build an emergency savings pot. Typically, an emergency savings pot should cover about three months' salary and be quickly accessible so that you can use it whenever you need it.
What to do with 50k lump sum? ›
How to invest $50,000
- Look into investment accounts. ...
- Explore low-cost investments. ...
- Consider diversifying your assets. ...
- Max out your retirement accounts. ...
- Optimize for tax implications. ...
- Invest for more than retirement. ...
- Chat with an advisor.
But over the long haul, you can expect your investments to grow at about 10% a year, doubling every seven years or so.
How often should I invest in S&P 500? ›
A simple strategy for investing in the S&P 500 is to buy a set dollar amount each week or month and hold it for the long term. This is known as dollar-cost averaging. Dollar-cost averaging is a strategy where you divide the total amount you want to invest across periodic purchases of the target asset.
Is 100 stocks too many? ›
But while it's definitely a good idea to own a few dozen stocks, you don't want to load up on too many. Stocks aren't an investment to set and forget. It's important to keep tabs on the companies you're invested in. And that's a hard thing to do 80 or 100 times over.
Is it bad to invest in too many stocks? ›
Can you over-diversify a portfolio? Yes. Holding 50 stocks rather than 25 may lower your downside risk somewhat, but it can also reduce your profit potential. And at that point, it may be better to consider investing through an index fund, or even a combination of several sector-based funds.
If you think $100 won't be enough to invest, think again. With a little patience and discipline, you can grow that small sum of money quickly. After all, the amount you invest at first is not really what matters when it comes down to it. It's all about getting started.
Is $5,000 saved good? ›
Saving $5,000 in an emergency fund can be enough for some people, but it is unlikely sufficient for a family. The amount you need in your emergency fund depends on your unique financial situation.
How to invest $50,000 dollars for quick return? ›
7 Ideas for How to Invest $50,000
- High-Yield Cash Account. Considered one of the safest investments, a high-yield cash account can potentially keep your money safe. ...
- Tax-Advantaged Investment Account. ...
- Taxable Investment Account. ...
- Real Estate. ...
- I-Bonds. ...
- Precious Metals. ...
- Alternative Assets.
Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. They establish an emergency account before ever starting to invest. Millionaires bank differently than the rest of us. Any bank accounts they have are handled by a private banker who probably also manages their wealth.
Is $100,000 in cash good? ›
There's no one-size-fits-all number in your bank or investment account that means you've achieved this stability, but $100,000 is a good amount to aim for. For most people, it's not anywhere near enough to retire on, but accumulating that much cash is usually a sign that something's going right with your finances.
Where is the safest place to put a large sum of money? ›
Storing your lump sum wisely
A savings account is a common choice, offering a secure place to keep your money while earning some interest. There are several types of savings accounts designed to cater to different needs and goals.
Why is it beneficial to invest over time? ›
One of the main benefits of a long-term investment approach is money. Keeping your stocks in your portfolio longer is more cost-effective than regular buying and selling because the longer you hold your investments, the fewer fees you have to pay.
Is it good time to do lumpsum investment? ›
Ultimately, the right time to invest in SIP or lump sum investment is when you are financially prepared and clearly understand your investment goals. Consider your risk tolerance, investment horizon, and the specific financial objectives you aim to achieve.
Why is it better to invest now than later? ›
The sooner you start to invest, the sooner you can benefit from the power of compound interest. Compound interest refers to the interest you receive on your investment, including the interest you receive on your interest. Hence, the sooner you start and the longer you invest, the more return you will generate.
What is the best way to invest lump sum? ›
By holding your lump sum in a cash savings account, as opposed to investing it in the stock market, you won't run the risk of your money falling in value just before you need to access it.
