Lump Sum vs Dollar Cost Averaging DCA

A question that is frequently asked by new investors. Should I invest my money all at once or a little at a time? The status quo answer from seasoned investors will be “Time in the market will beat timing the market” that goes to say that the market is unpredictable and anything can happen. Yes you can see an individual company free falling and know it’s time to bail or cut your losses, but the entire market can swing red or green on any given day. It can start out like a rocket and crash just as quickly.

I’m using $6,000 as an example because that’s the current limit for IRA’s. I went back and ran the numbers using Vanguard’s Total Market ETF VTI . I checked the outcome of investing $6,000 on January 1st of every year versus deposits of $500 a month starting in 2012 for 10 years of data. In either scenario your total out of pocket is $6,000, but as you can see from the chart below the lump sum method outperformed DCA’ing every year. Even in down years like 2015 & 2018 where you lose money, Lump Sum finishes the year ahead and after 10 years with a total of $60,000 invested Lump Sum comes out ahead $151,721 vs $141,487 or a 7.2% higher return.

Not everyone has $6,000 to contribute to their IRA’s at the beginning of the year, but if you plan accordingly the numbers show that it’s best to Lump Sum. The only time I would DCA is with a large windfall, let’s say an inheritance of $50,000. In this example I would slowly invest $10,000 a month over the span of 5 months, puts your mind at ease and no buyers remorse but you have to stay the coarse and keep investing.