Lump Sum Investing or Dollar Cost Averaging?

Recently, I had an email exchange with one of our readers about how to start investing in the Roth IRA. Previously, I stated that I usually transfer $5,500 to my account, then wait for a pull back to invest. The main reason I invest $5,500 at once instead of spreading it out over the year is to avoid the transaction fees. I don’t want to pay $10 or whatever it costs to add shares to my Roth IRA every month.

Here is Howard’s question.

“I am about to put in my $5,500 in the IRA. I plan to buy a fund. But the fund has a minimum so I have no choice but to invest $3,000 at once. Beyond that, I would find it easier, this time around, to just put the whole $5,500 in at once.

But the thing is the fund is now at an all-time high. So I’m confused as to whether I should invest the $3,000 now and then wait to invest the other $2,500 over time, just invest it all now and not worry that the price is high (since this isn’t that relevant in the really long-term for something you’re going to hold for decades and it may not go back down anyway anytime soon) or if I should actually just put it in the IRA and wait for the price to come down before investing any of it. Should I even be worrying about the price in a situation like this?

I have been told that in general, I should dollar cost average to minimize the influence of these low vs. high prices over time. So in the future, my plan was to invest a certain amount each month or something like that (although I’m curious why you don’t do that and seem to say you do it in a lump sum every year?) But the minimum requirement means I have no choice but to make at least one large lump sum investment.”

Lump Sum Investing or Dollar Cost Averaging?

For Howard, I don’t think it really matters all that much whether he invests $5,500 in lump sum or splits it into two installments. When you are starting out, your saving rate matters much more than your choice of investment. If Howard contributes another $5,500 next year, he will have doubled the value of his Roth IRA. At this point, it doesn’t really matter if he invests in one lump sum or dollar cost average. As long as he keeps adding $5,500 to his Roth IRA every year, it should work out well for him in 30 years.

I pointed Howard to a study from Vanguard  – Dollar Cost Averaging just means taking risk later. The study shows that LSI outperform DCA about 2/3 of the time. This makes sense because historically, the stock market has gone up over the long term. When you wait (DCA), you’re losing out on the gain the market is making.

The study also mentioned that if the investor is primarily concerned with minimizing downside risk and potential feelings of regret (resulting from lump-sum investing immediately before a market downturn), then DCA may be a better fit.

Lump Sum Investing is Scary

I must be getting a lot more conservative as I get older. When I was younger, I never hesitated to invest a lump sum. I know I had 30+ years to invest and the market has always done well over the long haul. However, now that I’m older, I’m much more concerned with minimizing the downside risk.

We are selling our rentals and will have a lump sum available soon (hopefully). This will be a significant percentage of our net worth and I don’t think I can stomach investing everything at once.


Am I being a hypocrite for telling Howard to invest $5,500 at once while I hesitate to do the same? It’s always clearer to analyze someone else’s situation. When you’re looking at your own problem, emotion can muddy the waters.

Anyway, Howard still has a lot of human capital left. He’ll work for many more years and keep investing in his retirement accounts. On the other hand, I don’t make much money anymore and I need to be a little more defensive. We are contemplating paying cash for a house and that is a very conservative play. I suspect we’ll end up investing part of the lump sum and then use the rest as a big down payment for a house. I’ll keep you updated.

How do you invest a lump sum?

Our friend, Nick at, faces a similar situation and writes an extensive article about it – What do you do when there’s nowhere to invest? Check it out.

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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43 thoughts on “Lump Sum Investing or Dollar Cost Averaging?”

  1. Having done some math in the past one thing I’ve noticed is that I have lost a lot of money waiting for a pull back. Start at 100 and say you want a 10% pull back to get in. That means you want to wait for the market to hit 90. But over the next 6 weeks it goes up 2% and now sits at 102. Are you still waiting for it to pull back to 90 or are you now waiting for it to pull back 10% to 91.8? 6 more weeks go by and it is up to 103.5. Now what? And most importantly, why do you expect a pull back? Is the index fund you want overpriced at 100 and should, based on fundamentals, be 10% less?

    I have done a lot better just investing the money when the cash is available to invest. With long horizons I don’t think you profit from waiting for pull backs.

    • That’s the opportunity cost of waiting. The Vanguard study shows that. If your investing horizon is 20-30 years, there is no point waiting for a small pull back.

  2. I always hate it when a stock drops, even .01 after I buy it. Even an ETF index fund. Since I pour 10-15K into the market every month, I just do that monthly. I assume the market is going up, over time, so early money is better than late money.

    I max out my 401K early too. I put in 75% of my income some I max out by the end of February.

    Never up, never in. no guts, no glory.

    • Whoa, 10-15K into the market every month? That’s a lot of investment. Good for you!
      When I was younger, I didn’t like the market dropping, but now I know it’s a good opportunity. So I don’t mind so much anymore.

  3. The last time we had a large lump sum, we paid off the house. As far as LSI or DCA, I DCA’ed into the 2008 downturn. It just so happened that our company was bought out in 2006, with payments in 2006 and 2008, so we had money to invest. I did an LSI with the first payment in 2006. I was afraid to LSI in 2008 given the market and credit conditions at the time. I started to DCA to money into the market in late 2008. I got it all in by March 2009. Boy was that lucky.

  4. I contribute $1458 every month into my Roth TSP (military version of the 401k) and $450 into my Roth IRA and my wife’s Roth IRA. I never try to time the market and I’m only focused on building my portfolio deposit by deposit, month by month. Technically, this is “dollar cost averaging,” but not really, because I don’t have a stockpile of money I’ve saved and then invested. I’m just investing with each paycheck I receive.

    By the end of the year I’ve maximized my tax advantaged accounts and then just sweep any additional savings or windfalls through the year into my taxable investment accounts.

    If you have a pot of money sitting around, then yes, lump sum invest it! Get that money into something producing more return than a 0.1% savings account! If you don’t, then deposit a little bit of each paycheck into your investments. No transaction fees over at Vanguard whether you LSI or DCA.

  5. If it’s $5500 per year it’s already a kind of DCA, just on a lower frequency (once per year instead of once per month).

    My wife and I do lump sums into Roth IRAs simply because I find it to be less effort than manually making contributions multiple times per year.

  6. So called dollar cost averaging is a marketing artifice invented by Wall Street marketers. It’s nothing more than a way to seduce more people and more money into money managers’ hands than would otherwise be the case.

    Can someone point us to an academic study that shows dollar cost averaging yields greater returns than lump sum investing?

    • I suspect that you’re right. DCA is just an easy way for regular people to invest. Most people don’t have a lump sum sitting around.

      • Exactly, for most people, it is a matter of DCA or waiting and saving the money to collect so you can lump sum invest after you have collected a few months of cash. In that scenario, DCA with auto invest probably is the smartest thing to do because if you just wait and save, one is likely to just keep waiting…and waiting…and waiting.

  7. I am not sure that splitting the $5,500 into two payments is dollar cost averaging anyway, wouldn’t it be DCA if the $5,500was split into 11 $500 dollar chunks, and tees invested each month.

    I have just received the cash from the Vodafone sale of their stake in Verizon wireless which was about £5k, and I have posted in my blog how I invested it straight back on the basis that if I am out of the market I am not earning dividends (the share price becomes almost irrelevant once I have bought).

    I therefore would invest it all now.

    One final point is that compound interest is a product of percentage return and time invested, another of my post explains that deferring an investment by a year when you are investing over a thirty to forty year timescale can reduce the value of your investment at the end of this period by thousands (You lose the interest on the years lost at the end not the beginning).

    Best wishes to everyone investing.

    FI UK

  8. Great question and, even though the answer is simple, the execution is not. It takes big stones to invest big money all at once. We just invested my bonus and while it was not huge money, it was hard to do.

    My only tip might be to trick ourselves into LSI by using the money to rebalance. Our AA is usually slightly out of whack. Rebalancing via purchases only might take some of the fear out of LSI.

  9. I recently made 2 $5,500 lump sum investments into IRAs for my wife and me, and just yesterday lump sum invested my HSA account. Each time before I click “submit” I always have an internal battle on whether I should break up the investment to dollar cost average. I end up clicking submit though, to save on having to think of it any longer, and to get that money working for us right away!

    That being said, I dollar cost average our other investments – $550/wk. – straight into our Betterment account. Set it and forget it works pretty well for me there.

  10. Joe, I think as long as you invest in either fashion you will be better than average. We get so focused on minimal things, and lose focus on the big picture. I see your strategy for the house, you are uncertain which route to take and you want to play both sides. Good luck.

    • You’re right. Investing is better than holding cash in the long run. I’ll probably invest some of it and use some for a house.

  11. When it comes to retirement account contributions, I’m a DCA guy. I use Vanguard for my Roth IRA (I only contribute a small amount these days since I’ve shifted to maxing out my 401(k)) and there are no transaction fees when making monthly contributions. If there were fees for each transaction, then I could see how lump sum would be beneficial. The lump sum approach is definitely riskier – you either catch the market at a good time or not! I prefer not to take on that risk. Also, not everyone has enough money on hand to do a lump sum investment. So, for those people, it’s more convenient to set up auto monthly contributions and then just not worry about it.

  12. I would treat this like exercise, make it as simple and repeatable as possible. Spend too much time thinking, planning, and optimizing and you run the risk of never getting started. Just do it (lump sum) and then do the same thing again next year, and the next year… DCA if it keeps you in the market and you automate it, but it introduces too much probability of failing to follow through, IMHO.

    • This hits the nail on the head for me. I planned on back in 2009 investing monthly in SPY….I never made it past month one. Now that single purchase is right at 100% return. Oops.

  13. I’m trying to time the market right now. I want it go down! But I also want to do it before the end of March. It’s hard. I have been waiting since January for a pullback, and sometimes I wish I would have just bought in January. Part of me just wants to buy index funds and be done with it!

    • See, it’s stressful when you’re trying to time the market. If it’s not down by the end of March, you should probably just stick it in the index fund and be done with it. You still have a long time left so there is no point stressing about it. I doubt it will make much difference in the long run.

  14. As someone newer to investing, I am lump summing when I can (which ends up being DCA over time).
    What I am wondering is, since I am a newer investor, should I invest what I can when I can? (What I am asking is, do I need a cash position?)

    • Yes, you need some cash for emergencies. 2-6 months in cash in case something come up. Other than that, I think just invest when you can. You don’t really need to hold cash while waiting for an opportunity.

      • I do have an emergency fund, but I don’t count it as part of my portfolio allocation.
        Reading a lot of online portfolios, I see a lot of:
        X% US equity
        Y% international equity
        Z% bonds
        5-10% cash
        I guess that 5-10% for me is just minuscule, compared to the time in the market that that can generate, so I should just invest.
        Thanks for the response.

  15. $5,500 is a such a small sum that I would invest it all at once and never look back. If you are retiring in a couple of years maybe it would matter (maybe) but if it’s 20-30 years away who cares? Waiting for a market pullback is market timing and that’s been proven to not work out very well most of the time.

  16. I did a similar investigation a while ago where I took historical data for Vanguard’s S&P 500 index fund and figured out what my balance would be if I had either dollar cost averaged on a monthly basis, or bought in a lump sump once a year.

    I found that it’s really only helpful as a budgeting tool and doesn’t have the effect that a lot of advisors will tell you it does. They usually use extreme examples where the investment values swing wildly and just happen to show that their method is best. I used actual mutual fund data and found it’s mostly a wash.

    • That’s what I guessed. It shouldn’t make much difference when you contribute every year to an index fund. Individual stock on the other hand can be much more volatile.

  17. I don’t think you’re really being a hypocrite as so much of it is situational in nature. In this case, just starting out investing and maxing that Roth out are what matters them most as opposed to splitting it up in to 2-3 chunks. In your case, it makes more sense to look at your options before jumping in all at once with a significant part of your net worth. For us, if it is a larger amount then we do tend to split it up, but just depends on what is going on at the time.

    • Thanks for your support. 🙂 I guess it’s all relative. $5,500 is a large amount to Howard, but it’s really not that big when you think about how much it takes to retire.

  18. I usually recommend lump sum, particularly when the amount in controversy is relatively small (like $5500 when you’ll need 100x that or more to retire). The research is in favor of lump sum.

    But since we are at a high point in the market, I have mentioned DCA’ing as a way to limit buying at the highest point. It might scare off first time investors if they put a big lump sum (big for them) into the market then lose 5-10% in a short period of time.

    • You took the words out of my mouth, Justin. In his situation, I wouldn’t worry about it too much. When you’re in your 40s and you’re sitting on six figures, it’s a bigger issue.
      Also, since we’re early in the year, why not wait a bit to see what happens?
      Sometimes when there’s something I want to buy but I’m a little unsure about the price, I’ll put a limit order in at 10% below today’s price and let it sit out there a while. That way you don’t have to obsess over the daily price fluctuations for months on end.

      Thanks for the mention, Joe!

  19. I’m going to follow you in as a bit of a hypocrite and say he should lump sum in this situation, even though I didn’t do this with my first investments as I was worried about the market dropping. In hindsight the amount I put in was so insignificant and I think on balance now I would have preferred a huge crash so I could subsequently have bought more into a lower market! Saying that, he should obviously not fear an imminent crash as no one knows what the market is going to do.

      • I should follow this up with saying that when I pumped my first bit of money into the market it seemed nearly at it’s peak but it has still gone up since. Obviously no more guarantees to keep going up but that underlines the point that we don’t know what is going to happen

  20. In my opinion, the most important part is investing at all. I tend to break up purchases into 3 or 4 blocks, but it’s not practical to do that with $5,500. I always figured if you’re starting out, or want to be hands off, dollar cost averaging into indexes is the way to go

    • $5,500 might sounds like a lot now, but it’s not that significant if you keep contributing over 30 years. I don’t think it will make much difference either way. Just focus on finding money to invest. Dollar cost averaging over the long haul is good.


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