The Case For Lump-Sum Investing (The Superior Way to Invest?)

August 29, 2023

Is lump sum investing better than dollar cost averaging? Check out our case study where we show a real-world example of when it may make sense to lump sum invest rather than dollar cost average.

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Let’s look at the case for lump sum versus the case for dollar cost averaging, because you already said that they both can make sense. But a lot of times, people don’t really just want to know, ‘Okay, well what could make sense? Is there a mathematical answer to this? Is there a probabilistic answer that this one method does make the most sense?’ And I think some academics out there, some research would suggest that probably one of these does generally make more sense than the other when you look at historic outcomes.

Yeah, what’s in the background of all this is Vanguard. Every few years, they do a research study. Now, the data that Vanguard used in this group was from 1976 all the way through 2022. And here’s what they found, and by the way, this is not unusual. They’ve done this research report for years now. Matter of fact, when Daniel said, ‘Hey, they’ve got a new research report,’ I was like, ‘Is the answer X?’ And he’s like, ‘Yeah.’ So they’ve updated the data and that’s great. But we know this: lump sum investing, because we’ve shared all the time, if you’re looking at the S&P 500, 8 out of 10 years typically it makes money. Now, Vanguard actually used the MSCI World Index and they came in with 68% of the time lump sum investing is better. So, that makes sense. Hey, look, we understand with this ever-expanding economy, the law of accelerating returns with innovation, it makes sense to be an investor. Hence, that’s what actually drives the Money Guy show and why we all want our money to work as hard as we do. And this kind of makes logical sense. You already said it, Brian. If the market more often than not is going up, the sooner we get those dollars to work, probably the better it’s going to work out for us. You know, if you look at it day over day, I want to say the market is generally slightly more than 50% of the time positive. But if you look over a year-over-year basis, as you just said, 8 out of 10 years the markets are going up. So, if you can get that money working, there’s a really good chance that it’s going to work out more advantageously for you. This Vanguard article found that it was 68%, so we said, ‘Okay, well let’s look at a case study. Let’s assume that we have two folks that are going to invest at a specific time period. So, what if you’re going to invest $120,000 in March of 2009 as a lump sum versus dollar cost averaging over 10 months, doing $12,000 every month for 10 months? Which one, if we look at it today, would have been better?’

Well, you can see the lump sum investor that invested all $120,000 of that in March would have a portfolio value now of a little over $1,020,000. The person that dollar cost averaged through that time would have about $730,000. So, it’s almost a $300,000 spread between the two. Yeah, it’s actually around 28%. Now look, this is the extreme. When Daniel and Megan were putting together the data, we had a conversation about it and I said, ‘Look, let’s go ahead and give lump sum its best option.’ So, we kind of cherry-picked this on purpose. We went with, we knew the recovery of the Great Recession started in March of 2009, so we went ahead and said, ‘Let’s start lump sum investing.’ And you can see that it was a big difference. Now look, I want to be honest, if we had just gone back and said, ‘Hey, why don’t we start this in January of 2009?’ We ran the data on that, they almost came in exactly the same. So, timing matters. You can imagine if you’re hitting the market when it’s in recovery and you’ve got that, think about the rubber band effect when you’re returning to the norm, meaning that markets, when they’re getting crushed, typically that velocity of recovery is some of your best performance. It makes sense. Lump sum investing is going to do really, really well. For more information, check out our free resources.



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