Lump Sum Vs Dollar Cost Average

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DR AJ
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Lump Sum Vs Dollar Cost Average

Post by DR AJ »

Everyone has read this.

“ time in the market is more important than timing the market.”

Does it mean that if you have half a million dollars laying around(waiting for the market crash), you should put it to work right away, or should you dollar cost average over six months. I am having a hard time putting Lump Sum Investment.

if you lump sum half a million dollars now, is it going to be better in the long run versus the dollar cost average 50,000 a month?

Thank You All
newyorker
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Re: Lump Sum Vs Dollar Cost Average

Post by newyorker »

This topic has been beaten to death but yes...


Lumpsum has twice chance of beating DCA in return.
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Eagle33
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Re: Lump Sum Vs Dollar Cost Average

Post by Eagle33 »

You can lump sum half the amount on Tuesday and then DCA the remaining half over 10 months. That way you will be guaranteed to be half right.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
mega317
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Re: Lump Sum Vs Dollar Cost Average

Post by mega317 »

How long have you had this half a million laying around? Because if you had it in March I bet you're feeling pretty bad right now. On the other hand, the sucker who lump summed half a mil at the peak in February has more money than you right now. I guess your post doesn't say that you weren't fully invested since March 23 and just sold everything on Wednesday.

Lump sum is the mathematical answer. You are not a robot. I recommend you DCA. I would rather lump sum just to have fewer tax lots 8-)
https://www.bogleheads.org/forum/viewtopic.php?t=6212
Actin
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Re: Lump Sum Vs Dollar Cost Average

Post by Actin »

Lump sum is mathematically superior, but DCA removes a lot of emotional stress. I remember I lost $300 the very first day my money went to VTSAX several years ago. That amount of money is nothing, but I remember feeling like I got scammed seeing that.

I actually think doing the reverse of what the posts above said. Start with the minimum $3,000 and DCA until you feel comfortable putting in larger amounts.
CurlyDave
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Re: Lump Sum Vs Dollar Cost Average

Post by CurlyDave »

The real answer is whichever one will get you out of dithering mode and into action first thing Tuesday morning, since tomorrow is a holiday.
Admiral
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Re: Lump Sum Vs Dollar Cost Average

Post by Admiral »

As long as you don't/won't need the money in the near future, lump sum. If you think you will, you can DCA most of it, or buy bonds with whatever you think you'll need.
livesoft
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Re: Lump Sum Vs Dollar Cost Average

Post by livesoft »

DR AJ wrote: Sun Sep 06, 2020 9:04 pm if you lump sum half a million dollars now, is it going to be better in the long run versus the dollar cost average 50,000 a month?
On average, LS will outperform DCA about 2/3rds of the time and only on average by a few percent.

On average, DCA will outperform LS about 1/3rd of the time.

See also: The Final, Definitive Thread on Dollar-Cost Averaging
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TNWoods
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Re: Lump Sum Vs Dollar Cost Average

Post by TNWoods »

While it is true that lump sum beats DCA 2 out of 3 times in backtesting, remember that backtesting is a broad, generalized observation of what happened in the past, and can't necessarily be applied to a specific instance now.

We do know that when it has been better, it has only been a little bit better.

So, as mentioned above, do whichever you feel comfortable with, so long as you get the money invested. In the long run, you will either get an "A" or an "A+" on your account's report card.

Google "Bob, the world's worst market timer", and it will illustrate the issue.

TNWoods
livesoft
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Re: Lump Sum Vs Dollar Cost Average

Post by livesoft »

DR AJ wrote: Sun Sep 06, 2020 9:04 pmI am having a hard time putting Lump Sum Investment.
Then don't Lump Sum. It really is not a big deal either way despite what people here might have you believe.

However, if you see the market drop, then will you move more into the market? Or will you write, "Well, the market is going down and will probably go down further, so I will wait to put more in the market."

There was poster who actually posted, "I am waiting for a 10% drop in the market before I invest", but on that exact day the market had reached the 10% down point from the earlier high and the poster did not even know it. That is, they posted on the exact day they should have invested.

Write down your plan -- whatever it is -- and follow it.
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whereskyle
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Re: Lump Sum Vs Dollar Cost Average

Post by whereskyle »

DR AJ wrote: Sun Sep 06, 2020 9:04 pm Everyone has read this.

“ time in the market is more important than timing the market.”

Does it mean that if you have half a million dollars laying around(waiting for the market crash), you should put it to work right away, or should you dollar cost average over six months. I am having a hard time putting Lump Sum Investment.

if you lump sum half a million dollars now, is it going to be better in the long run versus the dollar cost average 50,000 a month?

Thank You All
I want more money in the market, not less.

"DCAing" also can cause self-sabotage. Namely, you may think that no matter what you'll keep making those monthly contributions. But, after a few months, volatility has you sick, and you realize that you would actually like a new car or to just hang onto the money in cash, anything besides putting it in the market.

Investing is simple but it is not easy. If you are going to put the money into total-market index funds, the rules truly are simple. Get invested as soon as possible and stay invested for as long as possible. That is all.
Last edited by whereskyle on Mon Sep 07, 2020 8:26 am, edited 1 time in total.
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MotoTrojan
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Re: Lump Sum Vs Dollar Cost Average

Post by MotoTrojan »

If you had a half million dollars in a 401k with most of it being equity gains, would you move it to cash and re-DCA it in over 6 months? Of course not. The new cash is truly no different. DCA helps some people but it’s purely an emotional crutch with no logic behind it otherwise.
dknightd
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Re: Lump Sum Vs Dollar Cost Average

Post by dknightd »

Apparently 66% of the time lump sum wins. But past results do not predict future returns. If I did not need the money I'd probably invest it all on day one. If I thought I might need or want the money I'd do 50% on day one, then let the other 50% trickle in over the next few years. My plan, if this ever happens to me. 50% on day one, the rest spread over 2 years.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.
livesoft
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Re: Lump Sum Vs Dollar Cost Average

Post by livesoft »

Let's talk about the maximum drawdowns (losses) and average drawdowns (losses) of these two methods. The studies all highlight the average gains.
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Karamatsu
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Re: Lump Sum Vs Dollar Cost Average

Post by Karamatsu »

I am having a hard time putting Lump Sum Investment.
I think if you're having trouble putting all your money in as a lump sum, it just means that your asset allocation is too aggressive. Say you DCA in over the next six months or a year. At that point you will be all-in, and what matters then is the long-term. Long-term you want an allocation that matches your risk tolerance so if you know what that allocation is -- what is right for you -- then why not do it right away?

The usual, and totally understandable answer is worry about losses, but consider: How far would you have to dial back the riskiness of your AA before your worry about losses would seem manageable, the point where you'd feel comfortable investing everything now as a lump sum? If you can answer that question, then that's what your AA should be, because that's the one that really does match your risk tolerance. And so now you know what to do: invest as a lump sum using that "safe" AA, and from that point on, you're both fully invested and can sleep well at night.

The lump sum quandry is an excellent way to test your risk tolerance and find the AA that really is right for you.
Johm221122
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Re: Lump Sum Vs Dollar Cost Average

Post by Johm221122 »

My theory is also if you have to ask that question your too aggressive. Your taking more risk than you can handle. Simply lump sum into a portfolio that lets you sleep at night
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Eagle33
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Re: Lump Sum Vs Dollar Cost Average

Post by Eagle33 »

Morningstar article on the topic. When Dollar-Cost Averaging Can Help (or Hurt)
But the notion that dollar-cost averaging improves returns has been pretty thoroughly debunked. The reason is simple: If returns are generally positive, you're better off having more dollars working for you instead of holding them back to invest over time. Statistically speaking, the market goes up more often than it goes down, so keeping money off to the side usually doesn't help.
From a purely quantitative perspective, dollar-cost averaging usually doesn't maximize returns. In areas that are prone to volatile and poorly timed cash flows, though, it can lead to better outcomes over time.
I'm a lump summer because I can't forecast the future.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
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ruralavalon
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Re: Lump Sum Vs Dollar Cost Average

Post by ruralavalon »

DR AJ wrote: Sun Sep 06, 2020 9:04 pm Everyone has read this.

“ time in the market is more important than timing the market.”

Does it mean that if you have half a million dollars laying around(waiting for the market crash), you should put it to work right away, or should you dollar cost average over six months. I am having a hard time putting Lump Sum Investment [emphasis added].

if you lump sum half a million dollars now, is it going to be better in the long run versus the dollar cost average 50,000 a month?

Thank You All
Lump sum has been better about 2/3 of the time.

But the worst possible decision is to do nothing.

If too anxious to invest in a lump sum, then dollar cost average (DCA) over six months.

Or use the compromise solution, half now in a lump sum the rest in stages.
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nigel_ht
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Re: Lump Sum Vs Dollar Cost Average

Post by nigel_ht »

DR AJ wrote: Sun Sep 06, 2020 9:04 pm Everyone has read this.

“ time in the market is more important than timing the market.”

Does it mean that if you have half a million dollars laying around(waiting for the market crash), you should put it to work right away, or should you dollar cost average over six months. I am having a hard time putting Lump Sum Investment.

if you lump sum half a million dollars now, is it going to be better in the long run versus the dollar cost average 50,000 a month?

Thank You All
I started my DCA in Jan and am 9 months in a 12 month DCA. I changed my AA to 50/50 from 70/30 in June and holding off on buying more bonds and not working about inflation for the moment. That means my cash allocation in my AA will be higher than originally planned in my Jan 2020 IPS.

Not too worried about being a little ahead or behind lump sum. I made some market timing plays in March that put me ahead of the game vs vanilla VTI and was able to TLH a bit too.

Once covid is past I'll move back to 70/30 unless we have a big crash where I'll increase my stock AA according to my IPS.

Whether it's worth putting $500K into the market in Sept 2020 is heavily dependent on the size of your overall portfolio and your time horizon...if you didn't use some of your dry power in March you aren't likely to ever do so...I'd just choose a more conservative AA and rebalance in November/December...
GMT-8
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Re: Lump Sum Vs Dollar Cost Average

Post by GMT-8 »

We had just that dilemma when a large inheritance check arrived 10 days ago.

Knowing all the theory doesn't make it easier; I know Lump is better but I hedged my bets.
I put in 80% in bonds on Friday, 20% in stocks on Monday and now our Asset Allocation is balanced.
I have since forgotten what happened to the market and won't know whether it worked for me or not.
And so I am without any regrets.

Try it.

GMT
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