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Short Summary
Main recommendation: If you have a lump sum to invest, invest it in a risk-appropriate portfolio as soon as possible rather than dollar cost averaging or waiting for a market dip. Ben Felix argues lump sum investing has beaten dollar cost averaging most of the time in the data he cites, and that dollar cost averaging is best understood as a behavioral tool to reduce regret rather than a way to improve returns.
Key Points
- Lump sum investing beat dollar cost averaging about 65% of the time across the full sample from a 2020 analysis of six stock markets, with the cash earning one-month US Treasury bill returns while waiting.
- Dollar cost averaging's estimated annualized cost was about 0.38% over 10 years, which Felix notes is more than the fee on most index funds.
- Even in the worst 10% of lump sum outcomes with perfect hindsight, dollar cost averaging trailed lump sums more than 50% of the time, and lump sums still won after a 20% or greater market drop and when US stock valuations were in the 95th percentile of expensiveness.
- Buying the dip (waiting for a 10% or 20% decline) underperformed on average and in most 10-year periods, and waiting for a 20% drop underperformed more often and gave up more return than waiting for a 10% drop, and this held true even when the analysis was constrained to starting from all-time highs.
- A 2016 Journal of Wealth Management paper found dollar cost averaging is roughly equivalent to holding only 50 to 65% of the portfolio in risky assets, so risk-averse investors may do better with a lump sum in a more conservative allocation.
Details Worth Noting
- Concrete instructions: Decide first whether you have a lump sum to invest; if you are saving from each paycheck, you are already dollar cost averaging by necessity and there is no decision to make. If you do have a lump sum, invest it in a risk-appropriate portfolio as soon as possible. If you feel you need dollar cost averaging to avoid regret, Felix suggests reconsidering your asset allocation, since the portfolio may be too risky for you, and consider a more conservative allocation invested as a lump sum instead.
- Felix's framing: the choice is among investing the lump sum immediately, dollar cost averaging over a set period by investing equal parts on a schedule, or waiting for what feels like a good time to invest.
- The 2020 analysis compared lump sum and dollar cost averaging across six stock markets; Felix says the regret-minimization benefit of dollar cost averaging is a personal decision weighed against that estimated cost.
- Felix cites Meir Statman's 1995 paper explaining that dollar cost averaging can reduce regret by avoiding investing a whole lump sum right before a crash.
- Felix's stated context: he is a portfolio manager at PWL Capital, and the analysis is presented as general investment research rather than personalized advice.
Bottom Line
Lump sum investing is the statistically favored default, while dollar cost averaging is mainly justified as a way to manage the emotional difficulty of investing a large sum at once.
