Dollar Cost Averaging or Lump-Sum? Yes.

Gary Silverman, CFP®

Last week I told you about Dollar Cost Averaging (DCA). It’s what many financial folks recommend if you happen upon a pile of cash. With DCA, instead of putting a lump of money into your investments, you split that lump into equal amounts and invest each piece at fixed intervals. 

DCA is supposed to help you by mechanizing your trades so that emotions don’t take over. If you follow the process, you’ll end up buying more shares if the market is down and less if the market is up. Because of this you will, on average, pay less for your investment and generate greater profits.

The problem is that people let their emotions about the market control their actions. They second-guess the DCA strategy and put less (or no) money in when the market is down and can’t wait to dump in their cash when the market is soaring. Thus, they end up paying more than they should have and generate fewer profits, if any.

There’s another time-honored way to get a lump of money in the market: Just put the lump of money in the market. “Oh, but it might go down,” you say. You are correct. However, I can assure you that the market will, eventually, go up again. I just can’t say when.

Lump-sum investing tends to be popular when the market has been going up. The more the up the more people want to pile money in. It’s less popular when there’s a bear market going on. It’s the only thing people buy that they seem to want to buy more when it’s not on sale than when it is.

At our firm we typically lump-sum in amounts worth less than 20% of what a client already has invested. More so if we just went through a correction or crash. The rest of the time and with the rest of the assets we use DCA.

You could, of course, divine the future and wait with your lump of cash until the market is about to go up and then put it all in. Good luck with that. There is a two-thirds chance that a year after you could have put the money in the market, it is already up and you missed it. 

I know people who went to cash around the time of the financial crisis (yes, way back in 2008) and are still waiting for the right moment to move back in the market. I even know one person who as far as I know is still sitting on the sidelines from when the tech bubble burst. It’s safe to say they’ve missed out.

So, if you’ve been given a lot of money and are wondering when to invest it, go ahead and Dollar Cost Average or go ahead and put the lump sum all in at once. Just don’t try to second guess the market in either case. It seldom comes out well.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing (available at amazon.com). Contact him at www.PersonalMoneyPlanning.com