Dollar-cost averaging vs. lump sum investing
The mathematically optimal answer, and why almost everyone ignores it.
Say you get a $50,000 bonus and want to invest it. Do you put all $50,000 in the market today (lump sum), or spread it out over 12 months ($4,166 per month) to avoid buying at a peak? This is one of the most debated questions in personal finance.
What the math says
Vanguard's research comparing lump sum to dollar-cost averaging (DCA) over 12 months, across US, UK, and Australian markets back to 1926: lump sum beat DCA about two-thirds of the time, by an average of about 2%. The intuition: markets go up more often than they go down, so waiting means you're usually buying at a higher price.
What the math leaves out
That 2% average advantage includes gigantic outliers in both directions. If you lump-sum in January 2008, you're down 50% by March 2009, and even if you eventually recover, the psychological damage might push you to sell at the bottom. DCA's real value isn't returns — it's regret minimization.
One nuance
If the money is for a short-term goal (under 5 years), this whole debate is moot. You shouldn't be investing it in stocks at all. DCA vs. lump sum is a long-term-money question.
Put this into practice
Worth tracks your accounts, budgets, and goals — so the concepts in this article aren't just theory.
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