Should You Invest Slowly or All at Once?

Dollar-Cost Averaging Has Potential Advantages — Especially in Volatile Markets

When you go to the beach, do you run full steam into the water, or do you slowly tiptoe in? Those different approaches have a parallel in the investment world: lump-sum investing and dollar-cost averaging (DCA).

Lump-sum investors put money to work by plunging into an investment all at once. By contrast, investors who use DCA gradually put their money to work in equal increments over a fixed period of time (e.g., six months, one year, etc.). During volatile markets, DCA can help an investor systematically accumulate more shares as the market fluctuates.

Scenario 1: Market Decreases in Value

The scenario below contrasts investing $100,000 using DCA vs. a lump sum when share prices are falling over one year.

The investor who used DCA fared better because the average share price ($191) was lower than the lump-sum price ($200).

Scenario 2: Market Increases in Value

The scenario below contrasts investing $100,000 using DCA vs. a lump sum when share prices are rising over one year. 

The lump-sum investor fared better because the purchase price ($180) was lower than the DCA average share price ($189).

Scenario 3: Full-Market Cycle

The scenario below contrasts investing $200,000 using DCA vs. a lump sum over a full-market cycle (i.e., the declining market in Scenario 1 followed by the rising market in Scenario 2).

Bottom Line: If you have the foresight to invest when the market is at or near a bottom, lump-sum investing would likely give you better results than DCA. But timing the market is nearly impossible, and markets are typically volatile. Therefore, DCA can be a prudent way to get invested—and stay invested—during volatile markets.

Disclaimer

Investing involves risk, including the possible loss of principal. For illustrative purposes only. Dollar-cost averaging neither assures a profit nor protects against a loss. Because systematic investing involves continuous investing regardless of fluctuating price levels, you should carefully consider your financial ability to continue investing through periods of fluctuating prices. 

Source: https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/should-you-invest-slowly-or-all-at-once.html