Lump-Sum Investing vs. Dollar-Cost Averaging Round 2: What Makes Sense for You?
In my last piece, we explored how to invest available cash: Should you invest it all right away as a lump sum? Or are you better off wading in more gradually with dollar-cost averaging?
In round one, we discussed why lump-sum investing has historically expected to generate higher returns over time. In markets that have risen more, and more often than they’ve fallen, the sooner you deploy your investable assets, the more time they have to grow. That said, general rules don’t always apply to you. Let’s look at when dollar-cost averaging may be preferred after all.
Considering the Big Picture
First, it’s important to emphasize:
No matter which way you go (lump sum vs. dollar-cost averaging), it’s unlikely to matter nearly as much as whether you invest efficiently to begin with.
By this, we mean:
- Planning: Start with an investment plan that reflects your personal goals and risk tolerances.
- Investing: Invest according to your plan in a balanced mix of low-cost, globally diversified index or index-like funds.
- Staying the course: Sticking to your investments over time and through various conditions.
If you can do all that, exactly how and when you add new money is less significant. The best approach for you is the one that helps you best adhere to these sensible investment practices.