This issue is as old as personal finance itself: What should an investor do with a large windfall, say, a bonus, gift, inheritance, etc.? Invest it all at once as one big lump sum or should we “ease into the market” and invest the cash in multiple installments? The latter is called Dollar Cost Averaging (DCA). This is a popular topic in the personal finance world and many of you might have read about it. JL Collins had a blog post on why he doesn’t like DCA and Vanguard has a nice study with extensive simulations showing that, on average, the lump sum investment pretty handily beats DCA. The intuition for that result is pretty straightforward: equities go up on average, so if you sit on your hands and voluntarily delay your investments you will have lower returns on average.
End of story! End of story? Not so fast! Even if you’re familiar with the subject already, please keep reading because we’ll have a new spin on this old topic. Spoiler alert: we propose a way dollar cost averaging will reduce risk and have the same average return as the lump-sum investment! Continue reading “How to invest a windfall: Lump Sum or Dollar Cost Averaging?”
