What everybody ought to know about Dollar Cost Average vs. Lump Sum Investing

in #money3 years ago

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There is always an on-going debate amongst investors, which is better Dollar Cost Average (DCA) or Lump Sum Investing (LSI)?



For DCA, you invest portions of money over time instead of investing your money all at once. For example, over one year, you might invest $1,000 per month, which equates to $12,000. Yet, with LSI, you will invest the $12,000 at once.

The problem with DCA is that it depends on market timing. With DCA, you may only be better off if the market goes down when you're investing your money. If the market is rising, then you'll want to invest it all at once.

In a study conducted by Vanguard, they concluded that the LSI beats the DCA strategy by an average of 1.5 to 2.4 %.

Financial means and behavioural finance

The following scenario is when DCA is maybe the better option. Just imagine you've had a massive windfall of money, e.g. inheritance or, lottery winnings or, a speculative cryptocurrency went to the moon. When you invest just before a bear market, an LSI could cause your portfolio to fall by 20 % or more. The outcome could be emotionally devastating. This could also influence your way of how you invest the rest of your life.

However, if you are looking in the short term to buy low and sell high by trading and the like, then DCA is of little use. If you invest prudently, though, this can give you the edge you need to achieve your goals.

The reality is a lot of people don't have the monetary means to commit an LSI. Instead, they plan to budget for investing a certain percentage of their income every month. And an excellent choice for those slow, stable investors is the DCA of their monthly contributions.

What approach do you follow? What are other pros and cons of both methods? Comment below as I am very interested to hear what the community thoughts are on this contentious topic.

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