The 66% Rule: Why Lump Sum Investing Crushes Dollar Cost Averaging

The classic dilemma: you inherit $100,000—do you invest it all at once (lump sum) or gradually over time (dollar-cost averaging)?

Key findings from 80 years of Vanguard research (US, UK, Australia):

• Lump sum outperforms DCA roughly 66% of the time (2/3 of historical periods).

• The main reason is “cash drag”—money left on the sidelines misses the market’s long-term upward trend (markets go up ~73% of years).

Why DCA feels safer: Loss aversion (fear of loss is twice as powerful as the joy of gain). DCA acts as emotional insurance, reducing regret if a crash happens right after investing.

The catch: In the 34% of times when DCA wins (e.g., investing right before the 2000 dot‑com crash), it limits losses. But you can’t predict whether you’re in a 2000 or a 2013 bull market.

Behavioral reality: If you would panic‑sell after a 10% drop, lump sum is dangerous for you. DCA is a “fee” you pay to stay disciplined.

Execution rules:

• Lump sum → invest immediately, then don’t look for 6 months.

• DCA → automate a 6‑12 month schedule; never manually decide each trade.

• Hybrid approach (50% lump sum + 50% DCA over 6 months) balances math and psychology.

Final takeaway: Doing nothing (leaving cash in a savings account) is the worst outcome. Pick a strategy, execute it within 6 months, and ignore the noise. The data is clear—now act on it.

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Summary of Transcript (0:00 - 8:00)

The Scenario: You inherit $100,000 and face a choice:

• Lump sum: Invest all at once immediately

• Dollar-cost averaging (DCA): Drip $10,000/month over 10 months

The Core Insight: Your gut feeling about which is "safer" is likely wrong. Historical data shows one strategy mathematically outperforms roughly 66% of the time (based on an 80-year Vanguard study across US, UK, and Australia).

Key Clarification: This debate only applies when you already have a lump sum of cash. Regular paycheck investing is different.

Why DCA Feels Safe But Has Hidden Costs:

• The "cash drag" keeps money on the sidelines earning ~2-3% while missing the equity risk premium (~6-7% historically)

• The market goes up ~73% of calendar years — by waiting, you're statistically betting against the house

• In rising markets, DCA means buying at progressively higher prices

The Psychology:

• Loss aversion (Nobel Prize-winning research): We fear losses twice as much as we value equivalent gains

• DCA feels like a psychological painkiller — it minimizes regret regardless of market direction

• But optimizing for feelings means mathematically choosing less future wealth

The Hard Data (Vanguard Study):

• Lump sum outperformed DCA roughly 2/3 of the time across all three markets

• The penalty for DCA averaged about 2-3% over the deployment period

• This held true for both 100% equity and 60/40 balanced portfolios

Summary of Transcript (8:00 – 16:00)

The 34% of the time when DCA wins (the “losing third”):

• DCA outperforms when the market falls immediately after you start investing and stays down.

• Example: March 2000 (dot‑com peak) – lump sum into the NASDAQ would have been crushed; DCA would have limited losses dramatically (Morningstar data: lump sum lost ~14% annualized vs. DCA lost under 2%).

• This is called sequence of returns risk – the order of returns can hurt you even if long‑term averages are fine.

• DCA smooths out entry points; you’ll never buy at the absolute bottom or top – you choose mediocrity to avoid catastrophe.

The unavoidable problem – you don’t have a crystal ball:

• You don’t know if you’re in March 2000 (crash ahead) or March 2013 (roaring bull market).

• If you DCA out of fear of 2000, you risk missing a decade like 2013‑2023.

• The cost of being wrong in either direction is real.

The behavioral reality check:

• If you lump sum and the market drops 10% the next week, will you panic sell? If yes (or maybe), lump sum is genuinely dangerous for you – not because of the market, but because of your own behavior.

• Panic selling turns a temporary paper loss into a permanent real loss.

• In that sense, DCA is a fee you pay to keep yourself from doing something stupid – a behavioral hedge.

• In “math land,” lump sum wins; in “human land,” the best strategy is the one you can actually stick with.

• If DCA helps you sleep at night, do it – but admit you’re buying emotional insurance, not being smarter than the market. The cost is statistical underperformance.

The “forever trap” (hidden leak in DCA):

• People set a DCA plan, then stop halfway because the market went up (don’t want to buy the top) or went down (want to wait for the bottom) or a headline scares them.

• If you don’t fully automate DCA, you’re just procrastinating with extra steps.

Execution rules:

• Lump sum: Log in, place the order, then close the tab and don’t look for 6 months. Delete the app if needed.

• DCA: Set a rigid contract – total amount, frequency, duration (e.g., $20k on the 1st of each month for 5 months). Automate it. Do not manually decide each trade – that’s market timing.

How long should your DCA window be?

• Keep it relatively short: 6 to 12 months is the sweet spot.

• Longer than 12 months creates severe cash drag, almost guaranteeing underperformance.

• A 6‑month window balances crash protection with getting money fully invested.

Summary of Transcript (16:00 – 23:15)

The Hybrid Approach (rarely discussed but often smartest):

• Split the difference: lump sum 50% immediately, then DCA the remaining 50% over 6 months.

• Example: $100,000 → invest $50,000 today, then $50,000 in monthly installments over six months.

• Benefits:

  • Captures meaningful expected return that pure DCA misses.

  • Keeps half in reserve to satisfy psychological need for safety.

  • If market goes up → glad you put half in immediately.

  • If market goes down → glad you have half left to buy cheaper prices.

• This is not a compromise – it’s a behavioral optimization that reduces worst‑case regret on both sides.

• Perfect for the investor who is rational but has irrational emotional reactions.

Who actually wins?

• Mathematically: Lump sum wins 66% of the time – generates higher expected wealth across all backtests. The rational choice for a robot or someone with complete emotional discipline.

• Psychologically: DCA wins for the right person – reduces variance, prevents catastrophic regret. The rational choice for a nervous human who might panic sell.

• No shame in admitting you’re human. The only shame is staying in cash forever because you’re paralyzed by the choice.

Final protocol:

• Pick one strategy, write the plan down, execute it.

• The market compounds for someone every day. The only question is whether it’s happening for you.

The most important takeaway:

• Smart money (institutional investors, professional fund managers) almost universally lump sums new capital into target allocations – they’ve all read this research.

• Patient discipline – “buy now, hold forever, ignore the noise” – beats almost every clever strategy designed to outsmart it.

• Most people don’t follow the data not because they’ve never seen it, but because their emotions overrule it when real money is on the table.

• Next time $100,000 lands in your account (inheritance, home sale, bonus, savings), you have the data, the protocol, and the hybrid option.

• The strategy you pick matters, but the strategy you actually execute matters infinitely more.

• The cash needs to leave your bank account within 6 months. Anything beyond that, and you’re losing it slowly every single day without even knowing the score.

• The math has been done. The 80 years of data have been collected. The conclusion has been published.

‘Fortunes are going to be made’ — Suze Orman on investing amid the coronavirus pandemic

Published: May 4, 2020

‘I can guarantee you that if you stay in and you just stick with it, three years from now you will be very, very happy that you did’  Suze Orman

Celebrity financial adviser Suze Orman isn’t for everybody. She once told MarketWatch that “there are people that hate my guts. You don’t even want to know the things they say.”

But there’s no denying that her common sense brand of money management has resonated with her devoted fan base over the years. Lately, with many in that fan base struggling to navigate the coronavirus pandemic, she’s been hitting the media circuit to address just some of the issues.

During a CNN segment that aired on Saturday, Orman was asked by a viewer how to approach investing in the stock market in the face of the historic volatility.

Here’s her answer:

‘Let’s just assume you have an eight-month emergency fund. Let’s assume you have no credit card debt. Let’s assume that you still have money coming in. You should be dollar-cost averaging every single month into the stock market.’

In other words, she’s advising those without more-pressing obligations to take a specific sum of money and invest it every month into something like the Vanguard Total Market ETF VTI, +0.38% .

“If you do it month in and month out and you have at least three five or 10 years or longer until you need the money you will be happy,” she continued. “If you need money within a year it’s not money that belongs in the stock market. Take it out now.”


Back in late February, when the Dow Jones Industrial Average DJIA, +0.11% had dropped more than 1,000 in a single session on fears of what the coronavirus could do to the U.S. economy, Orman raised a few eyebrows when she said “I rejoice” in the face of such pullbacks.

She used the opportunity to again push her case for dollar-cost averaging.

“The higher the market goes, the shares cost more, the less shares their money buys, the less money they make, in the long run,” she told CNBC. “With this dip, if it continues to go down, they should just stay the course and actually be quite happy because the market is still incredibly high.”

One month and a brutal stretch of market losses later, the New York Times best-selling author returned to CNBC in late March to urge investors to stick with the plan.

“You will never, ever, know the bottom. You will never, ever, know the top,” she said. “Fortunes are going to be made out of this time. So just stay calm. I can guarantee you that if you stay in and you just stick with it, three years from now you will be very, very happy that you did.”

Here’s Orman talking financial stability in a recent appearance on the Tamron Hall Show:


Orman, of course, is not alone in pushing the time-tested dollar-cost averaging approach.

For instance, Kimberlee Orth, the Ameriprise private wealth adviser who was ranked No. 2 in the U.S. among her peers in 2019 by Barrons, recently urged investors to stick with the same plan.

“If you were already in the market on Feb. 1 or March 1 or April 1, and you watched the market go down and those resources are allocated to a long-term goal and your risk tolerance is still suitable,” she said, “there’s no need to change that because the market is eventually going to go back up.”

Stocks took a hit early in Monday’s session, with the Dow off more than 1%, while both the S&P 500 index SPX, +0.42% and the tech-heavy Nasdaq Composite COMP, +1.22% also traded lower.

https://www.marketwatch.com/story/suze-orman-on-investing-in-the-stock-market-amid-pandemic-just-do-it-2020-05-03?mod=mw_latestnews&link=sfmw_fb&fbclid=IwAR2ug76ODx0mcvhLHoxWzy2jkysspaPIq-ju7ayxT8YSpLjVgA69eJeFn70

Strategy during crisis investment: Revisiting the recent 2008 bear market

FRIDAY, FEBRUARY 26, 2010

Strategy during crisis investment: Revisiting the recent 2008 bear market

Although we may not know where the bear bottom is, buying in a down market may still lead to losing money. This is definitely true. As long as the purchase is not at market bottom, it may still result in losses for the time being. This is likely to be a short-term loss but compensated by a probable long-term gain. Even if we cannot time the market perfectly, we are definitely better off to “buy low and sell high” then to “buy high and sell low”.

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Prices fell but value intact

Presently stock prices have fallen sharply. 

• Banks are trading at 1x book value, 
• property stocks sold at 50% discount from net asset value, 
• utility stocks trading at single-digit price-earnings ratio providing an earnings yield of more than 10% net of tax and 
• there are many good stocks trading at dividend yield of 2x bank interest rates. 

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Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values.He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”

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Catching a falling knife

Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices.There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom.Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.

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In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.

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Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines.

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Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning.When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.

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Emphasise strategies

What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.

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Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions. 

One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.

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Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market. 


http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html  

http://myinvestingnotes.blogspot.com/2010/02/strategy-during-crisis-investment.html

Benjamin Graham's advice to guide investors in a falling market

If You Think Worst Is Over, Take Benjamin Graham's Advice
By JASON ZWEIG

May 26, 2009

It is sometimes said that to be an intelligent investor, you must be unemotional. That isn't true; instead, you should be inversely emotional.

Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events.

At this moment, consulting Mr. Graham's wisdom is especially fitting. Sixty years ago, on May 25, 1949, the founder of financial analysis published his book, "The Intelligent Investor," in whose honor this column is named. And today the market seems to be in just the kind of mood that would have worried Mr. Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over.

You can't turn off your feelings, of course. But you can, and should, turn them inside out.

Stocks have suddenly become more expensive to accumulate. Since March, according to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That's the sharpest, fastest rise in almost a quarter-century. (As Graham suggested, Prof. Shiller uses a 10-year average P/E ratio, adjusted for inflation.)

Over the course of 10 weeks, stocks have moved from the edge of the bargain bin to the full-price rack. So, unless you are retired and living off your investments, you shouldn't be celebrating, you should be worrying.

Mr. Graham worked diligently to resist being swept up in the mood swings of "Mr. Market" -- his metaphor for the collective mind of investors, euphoric when stocks go up and miserable when they go down.

In an autobiographical sketch, Mr. Graham wrote that he "embraced stoicism as a gospel sent to him from heaven." Among the main components of his "internal equipment," he also said, were a "certain aloofness" and "unruffled serenity."

Mr. Graham's last wife described him as "humane, but not human." I asked his son, Benjamin Graham Jr., what that meant. "His mind was elsewhere, and he did have a little difficulty in relating to others," "Buz" Graham said of his father. "He was always internally multitasking. Maybe people who go into investing are especially well-suited for it if they have that distance or detachment."

Mr. Graham's immersion in literature, mathematics and philosophy, he once remarked, helped him view the markets "from the standpoint of eternity, rather than day-to-day."

Perhaps as a result, he almost invariably read the enthusiasm of others as a yellow caution light, and he took their misery as a sign of hope.

His knack for inverting emotions helped him see when markets had run to extremes. In late 1945, as the market was rising 36%, he warned investors to cut back on stocks; the next year, the market fell 8%. As stocks took off in 1958-59, Mr. Graham was again pessimistic; years of jagged returns followed. In late 1971, he counseled caution, just before the worst bear market in decades hit.

In the depths of that crash, near the end of 1974, Mr. Graham gave a speech in which he correctly forecast a period of "many years" in which "stock prices may languish."

Then he startled his listeners by pointing out this was good news, not bad: "The true investor would be pleased, rather than discouraged, at the prospect of investing his new savings on very satisfactory terms." Mr. Graham added a more startling note: Investors would be "enviably fortunate" to benefit from the "advantages" of a long bear market.

Today, it has become trendy to declare that "buy and hold is dead." Some critics regard dollar-cost averaging, or automatically investing a fixed amount every month, as foolish.

Asked if dollar-cost averaging could ensure long-term success, Mr. Graham wrote in 1962: "Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions."

For that to be true, however, the dollar-cost averaging investor must "be a different sort of person from the rest of us ... not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past."

"This," Mr. Graham concluded, "I greatly doubt."

He didn't mean that no one can resist being swept up in the gyrating emotions of the crowd. He meant that few people can. To be an intelligent investor, you must cultivate what Mr. Graham called "firmness of character" -- the ability to keep your own emotional counsel.

Above all, that means resisting the contagion of Mr. Market's enthusiasm when stocks are suddenly no longer cheap.



http://online.wsj.com/news/articles/SB124302634866648217?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB124302634866648217.html

The Benefits of Dollar-Cost Averaging in a Volatile Market

The Benefits of Dollar-Cost Averaging


Volatile Market that ends up flat

Period      Amount       Price        No of shares 
             Invested $      $       Purchased 
1       1,000       100       10.00 
2       1,000         80       12.50 
3       1,000         60       16.67 
4       1,000         80       12.50 
5       1,000       100       10.00 
                  
Total Invested       5,000             
Total shares purchased                   61.67 
Average cost of shares purchased $                   81.08 
Value at period 5 ($)             6,166.67       
                  
                  
                  
Ebullient Market that rises continually                  
                  
Period      Amount       Price        No of shares 
             Invested $      $       Purchased 
1       1,000       100       10.00 
2       1,000       110       9.09 
3       1,000       120       8.33 
4       1,000       130       7.69 
5       1,000       140       7.14 
                  
Total Invested       5,000             
Total shares purchased                   42.26 
Average cost of shares purchased $                   118.32 
Value at period 5 ($)             5,916.32       


The table above shows that you actually end up with more money in the scenario where the market is very volatile and ends up exactly where it began.

In both cases, a total of $5,000 is invested over the 5 periods.  

In the flat volatile market, the investor ends up with $6,167, while in the scenario where market prices rise continually, the investor's final fund stake is only $5,915.



Learning Points:

Warren Buffett, has a nice way of showing that you might actually wish for lower stock prices (at least for awhile) after you begin your investment program.

He writes:

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?  Likewise, if you are going to buy a care from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?  These questions, of course, answer themselves.

But now for the final exam:  If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period?   Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.  In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying.  This reaction makes no sense.  Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

How to be a millionaire? Save regularly and save early.

Dollar Cost Averaging Can Reduce the Risks of Investing in Stocks and Bonds

Dollar cost averaging is not a panacea that eliminates the risk of investing in common stocks.  

It will not save your investment plan from a devastating fall in value during a year such as 2008, because no plan can protect you from a punishing bear market.  

You must have both the cash and the confidence to continue making the periodic investments even when the sky is the darkest.

No matter how scary the financial news, no matter how difficult it is to see any signs of optimism, you must not interrupt the automatic pilot nature of the program.  

Because if you do, you will lose the benefit of buying at least some of your shares after a sharp market decline when they are for sale at low prices.  

Dollar cost averaging will give you this bargain.  Your average price per share will be lower than the average price at which you bought shares.  

Why?  Because you will buy more shares at low prices and fewer at high prices.

Some investment advisers are not fans of dollar cost averaging, because the strategy is not optimal if the market does go straight up.  (You would have been better off putting all $5,000 into the market at the beginning of the period.).  

But it does provide a reasonable insurance policy against poor future stock markets.  

And it does minimize the regret that inevitably follows if you were unlucky enough to have put all your money into the stock market during a peak period such as March of 2000 or October of 2007.

There is tremendous potential gains possible from consistently following a dollar-cost averaging program.

Because there is a long-term uptrend in common stock prices, this technique is not necessarily appropriate if you need to invest a lump sum such as a bequest.

If possible, keep a small reserve (in money fund) to take advantage of market declines and buy a few extra shares if the market is down sharply.  

Though you should not try to forecast the market, it is usually a good time to buy after the market has fallen out of bed.

Just as hope and greed can sometimes feed on themselves to produce speculative bubbles, so do pessimism and despair react to produce market panics.  

The greatest market panics are just as unfounded as the most pathological speculative explosions.  

For the stock market as a whole (not for individual stocks), Newton's law has always worked in reverse:  What goes down has come back up.  

(A Random Walk Down Wall Street, by Burton Malkiel)

Burton Malkiel: Timeless Lessons for Investors

1.  Buy and Hold.  Don't time the market

He started his talk by tackling the issue :  "In the light of the 2008 Global Financial Crisis when the market dropped almost 50%, is buy and hold is now dead?"
The best days in the market that gave the best returns were usually the few days that leaped from the bottom of the market.
Don't try to time the market.  It is dangerous.  You can't do it and you will make mistakes.

2.  Dollar Cost Averaging

You make more likely to make more money in a volatile time than a steadily rising market, but this is not always the case.  Of course, if you know the market is going to be steadily rising, you will make more money if you invest a lump sum at the beginning..

3.  Rebalance your portfolio.

He advises rebalancing your portfolio once yearly, example, 60% stock and 40% bond target and rebalancing in January every year.  In a volatile market, rebalancing reduces the volatility and may also increase the return of your portfolio.  In a rising market, rebalancing will reduce the volatiltiy and may reduce the return of your portfolio slightly.

4.  Diversification

In 2008 and early 2009, there were few places to hide.  Many people opined that diversification doesn't work anymore.
Diversification works when the asset classes are not correlated.  Though many asset classes are now more correlated, you can still diversify, example, buying emerging markets and bonds.  How do you access China?  Why not through index funds? (@39 min)

5.  Costs matter

The lower the costs charged by the purveyor of the investment service, the better and the more is left for you.  "You get what you don't pay for!"  Cost you pay is the one thing you can control and you may increase your return by up to 2% per year just by ensuing the cost is low.  He advocates index funds.  Stock market is a zero sum game and costs of mutual funds of >1% shift the distribution of the stock market to that of a negative sum game.  90% of professional managed mutual funds are beaten by the index benchmark.  In his study of mutual funds over many years, less than 5 mutual funds have beaten the market by 2% or more ( @ 29 min).  Buy the index funds.  "It is like searching for the needle in the haystack.  Buy the haystack instead.".
Two-third of bond active managers are beaten by bond-index funds.  His advice is that the core of your portfolio should be in low cost index funds. (You can have more leeway in a satellite portfolio too.)


Q&A:
@ 43 min   Lump sum investing early or Dollar Cost Averaging when you have a big sum of money to invest.
Potential regret of getting into the high of the market.  Reduction in volatility.  Might not always be optimal.  At least some of this big sum of money should still put into the market in dollar cost averaging manner. Can you advise how long to spread this dollar cost averaging?  Depends on the returns from the alternative investments.  Spread your investing over a shorter period now, since the alternative investment return (interest rate)  is low.

@ 48 min.  Missing the 10 best days or missing the 10 worst days.  Some bias in presentation.

@50.30 min.  Corporate governance.

@53 min.  Dividend yield stocks of Warren Buffett.  Buffett is really the needle in the haystack.  Vanguard REIT - a good diversifier.

@1.04.50 min.  How would you invest $1 million?

@1.08.30 min.  What are the target percentages people of various ages should save?  Answer:  MORE.  If you start early, you may have to save a lot due to the compounding effect.  Those who did not save early, probably need to save a lot more to catch up (20% or more).  The opportunity cost of not saving $1 in your 20s might be $10 or $15 when you are in your 50s.






Uploaded on 1 Jun 2010
Dr. Burton G. Malkiel, the Chemical Bank Chairman's Professor of Economics at Princeton University, is the author of the widely read investment book, A Random Walk Down Wall Street. He has also authored several other books, including the recently published The Elements of Investing.

Dr. Malkiel has long held professorships in economics at Princeton, where he was also chairman of the Economics Department. He also served as the dean of the Yale School of Management and William S. Beinecke Professor of Management Studies. Dr. Malkiel is a past president of the American Finance Association and the International Atlantic Economic Association, and a past appointee to the President's Council of Economic Advisors. He continues to serve on several corporate and investment management boards.

Is Dollar-Cost Averaging Overrated?

By Adam Zoll | Morningstar – Tue, Oct 23, 2012

Question: Every year I add money to my IRA account in a lump sum. Would I be better off using dollar-cost-averaging over the course of the year?

Answer: Dollar-cost-averaging, which is a technical term for buying shares of a stock or mutual fund in equal dollar amounts and at regular intervals, is assumed by many investors and financial pros to be the best way to invest. The advantages are clear: By investing a given amount over time and in equal-sized chunks rather than all at once, the investor ends up buying more shares when prices become cheaper and fewer when they become more expensive.

For example, let's say you get a $1,200 tax refund. Rather than invest all $1,200 at once, you could invest $100 per month for a year. Now let's say the fund you're investing in sells for $10 a share in the first month but drops to $5 a share in the second. Using the dollar-cost averaging method, you would end up buying 10 shares in the first month, before the market drop, but 20 shares in the second, after the drop. Had you invested the entire $1,200 in the first month you would have owned 120 shares, which, in month two, would have declined in value to $600. In this way, dollar-cost averaging helps reduce an investor's exposure to a potential market downturn, a danger inherent in the lump-sum approach.

Dollar-cost averaging also fosters a level of investing discipline. Rather than trying to figure out the best time to invest a lump sum, dollar-cost averaging uses a more systematic approach that helps investors conquer bad habits such as buying shares only when the market is up.

If you have an employer-sponsored retirement account, you may be using dollar-cost-averaging without even knowing it. That biweekly or monthly contribution made to your 401(k) is a form of dollar-cost-averaging.

Putting Dollar-Cost Averaging to the Test
However, despite the conventional wisdom that dollar-cost averaging is usually the best way to invest, there is an opportunity cost to be paid for holding money in cash while it waits to be invested in the market. If the market goes up while you're dollar-cost averaging into it, you've lost out on any gains you would have had by investing the entire amount right away.

In fact, a recent Vanguard study found that, on average, lump-sum investing resulted in higher returns than dollar-cost averaging about two-thirds of the time. The authors looked at historical monthly returns for $1 million invested as a lump sum and through dollar-cost averaging over periods as short as 6 months and as long as 36 months, assuming that funds were kept in cash before being invested. They tested various stock/bond allocations ranging from an all-equities portfolio to an all-bond portfolio. Finally, they tested these variations on the dollar-cost averaging vs. lump-sum question over rolling 10-year periods from 1926-2011.

At the end of each 10-year period, the portfolio value of the lump-sum method was compared with that of the dollar-cost averaging method. The result: The lump-sum method delivered higher returns compared with the 12-month dollar-cost averaging method about 66% of the time regardless of whether an all-equities, all-bond, or 60% equity/40% bond allocation was used. When the authors conducted a similar analysis using historical returns for markets in the U.K. and Australia, a similar pattern emerged, with lump-sum investing consistently outperforming dollar-cost averaging.

The authors note that the longer the dollar-cost averaging time frame, the greater the chance of the lump-sum method outperforming. For example, dollar-cost averaging over 36 months lost out to the lump-sum method 90% of the time (for U.S. markets).

It's also worth noting that while lump-sum investing consistently outperformed dollar-cost averaging, the average rate of outperformance was relatively modest. Using a 60/40 equity-bond allocation in U.S. markets and dollar-cost averaging over a period of 12 months, the authors found that after 10 years the initial $1 million investment would have grown to $2,450,264 on average using the lump-sum method versus $2,395,824 using dollar-cost averaging, a difference of about $54,000 or 2.3%.

DCA Better in Declining Markets 
So the Vanguard study proves it's always best to invest in a lump sum if possible, right? Not so fast. As the authors concede, during market declines, the dollar-cost averaging method often performs better because it helps mitigate the effects of falling share prices, whereas the lump-sum method puts all the capital at risk in the market at once. They examined more than 1,000 rolling 12-month periods in U.S. markets and found that lump-sum investors would have seen their investment decline in value 22.4% of the time vs. 17.6% for dollar-cost averaging.

The Takeway
So what should we make of these findings? There appears to be little doubt that, when investing for the long-term, you'’re more likely to end up ahead using the lump-sum approach than dollar-cost averaging. (Again, assuming you have a choice--with a work-sponsored retirement account, you may not.) However, there are three important points in dollar-cost averaging's favor.

If you expect a market downturn in the near future, dollar-cost averaging is the better choice. By spreading out contributions at regular intervals, you are essentially limiting your exposure by keeping some of your money in cash. 

For some investors, a relatively modest shortfall in return is a small price to pay for piece of mind. If dollar-cost-averaging helps you sleep better at night than you would with an all-in strategy, it may be worth it.

Dollar-cost averaging, especially through an automatic contribution mechanism such as a 401(k) or automatic deduction from a bank account, offers a level of investing discipline that lump-sum investing doesn't. The lump-sum approach, by its nature, involves market timing, and that's a dangerous game to play, especially during times of volatility. Dollar-cost averaging provides a smoother, more consistent entry into the market.One last factor to consider is investing costs, which may provide an advantage for the lump-sum method. For example, if using dollar-cost averaging requires paying multiple brokerage fees to buy shares of a stock in several lots rather than just once, this may further erode your returns as compared with the lump-sum method.

Ultimately, your comfort level with lump-sum investing and your expectations about the market's near-term direction should help you decide if it makes sense for you. If moving a lump sum into the market all at once gives you a queasy feeling in the pit of your stomach, that may be all the answer you need.

Have a personal finance question you'd like answered? Send it toTheShortAnswer@morningstar.com.

http://finance.yahoo.com/news/dollar-cost-averaging-overrated-110000051.html;_ylt=Ak3sPEM.jQXx6OUrSMiBBUOiuYdG;_ylu=X3oDMTN2NWJtbGFlBG1pdANGUCBDb21tb2RpdGllcwRwa2cDN2IyYjg4NGYtNjljNi0zMGZhLThiOWMtMDBkZmUwZjk4ZjIwBHBvcwMzBHNlYwNNZWRpYVNlY3Rpb25MaXN0BHZlcgM2NDUxNzkxMC0xZDAxLTExZTItOWZmZS1lNGZmYjE2YjhmYzA-;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

Dollar Cost Averaging

Dollar Cost Averaging (“DCA”) often is popular during rising markets.

If DCA is adhered to over many years, then this formula should work.

The difficulty is that few people are so situated that they can invest the same amount each year.

Economic downturns often constrain one’s ability to invest just when stocks are trading at their lowest valuations.

Furthermore, when prosperity for the average investor returns, so too do high valuations.

Conquer Your Fear of Investing

Updated: 8/11/2011 

Many of the most worthwhile things in life are scary at first. Consider, for example, going to school for the first time, falling in love, learning to drive, starting a family, figuring out your new Tivo…

Investing is no exception. The thought of possibly losing money is a terrifying prospect. And the fact that today’s economy has seen better days probably isn’t helping those fears. Investing in the stock market has its risks. But if you give in to fear, you’ll pass up some incredible opportunities—ones that come with big dollar signs attached.

Now is actually a good time for young adults to bite the bullet and get started investing. Think of a market downturn as a clearance sale: It’s a good idea to go shopping before prices climb again.

Bottom line: Surrendering to fear only holds you back. If you want to get ahead financially, you’ve got to invest in your future. Below are five common excuses and the strategies you’ll need to overcome them.

FEAR: I don't want to lose all my money.

CONQUER IT: Diversify.

If your investments are too heavily-weighted in one stock or even one particular kind of stock, you can deep-six your savings goal. (Remember the tech bubble or, more recently, the financial services crisis?) Mutual funds are a good way to achieve instant diversification because they allow you to invest in dozens of stocks within a single fund.

One of the quickest ways to diversify, if you’re new to investing, is with a fund of funds that invests in other mutual stock funds. Or if you’d like something a little more conservative in this uncertain market, go for a so-called “balanced” fund that owns stocks as well as bonds. But bear in mind that for long-term goals, stocks should earn you the highest return.

FEAR: How will I know the best time to invest?

CONQUER IT: Dollar-cost average.

There’s no crystal ball that tells you exactly when the market will rise and fall. The trick is to invest regularly no matter what the market is doing. A simple strategy called dollar-cost averaging eliminates the guesswork. By investing a fixed dollar amount at regular intervals, such as every month or every quarter, you smooth out the ups and downs of the market. This trick takes out all the emotion—it’s scary to invest when the market’s falling, for example—and investing becomes much less daunting.

Mutual funds are, again, a great investment for dollar-cost averaging because you aren’t charged a commission each time you buy (like you are for individual stocks).

FEAR: I'm too queasy for the ups and downs of investing.

CONQUER IT: Ignore your investments.

When you obsess over how your investment is doing from day to day or week to week, you could be more tempted to tinker with it instead of sticking to your long-term diversified plan. Not to mention, you’ll probably lose sleep.That’s not to say you shouldn’t ever reevaluate your investment choices. Just don’t fixate on them.

FEAR: I don't have the time or knowledge to manage a portfolio well.

CONQUER IT: All-in-one funds or index funds.

Think simple. When you start investing and aren’t sure what you’re doing, don’t pretend you do. Truth is, most actively managed mutual funds don’t beat their market benchmarks. If those fund managers have the time, the education and the motivating paycheck, and they can’t pull it off, don’t worry if you’re afraid you can’t either.

Go with funds of funds to achieve instant diversification. Or assemble a simple index fund portfolio. Index funds don’t try to beat the market benchmarks, they match them. Put 75 percent of your money into a fund that tracks the overall U.S. stock market, 25 percent into one that tracks international stocks. Then let ’em ride. As your investments rise and fall, all you’ll have to do is realign your money every year or so to maintain the proper weighting in each fund.

One more way to set it and forget it: Sign up with your broker or fund company to have your regular contributions automatically withdrawn from your bank account.

FEAR: What if I need the money?

CONQUER IT: Set clear goals and choose your investments accordingly.

Before you start investing, write down what you’re investing for and when you think you’ll need the money.

If you’ll need the money within the next three to five years, preservation is your number-one aim. Put that money somewhere safe and accessible, such as a money market mutual fund or a high-yield online savings account. You could also opt for a bank certificate of deposit. But bear in mind your money is locked in for the term of the CD, and you’ll pay a hefty penalty if you need to cash out early.

If you’re investing for the long term, growth is your goal. Invest that money in a broad-based mutual fund that holds mostly stocks. If disaster strikes and you really need the money, you can cash out at any time – but you’ll have to pay taxes on the money you made.

http://www.kiplinger.com/magazine/archives/2009/01/fred_frailey.html