If you have some money saved, and you're ready to get started with investing, you'll face a common dilemma. You could invest that money all at once. This is known as lump-sum investing, and it gets you fully invested right away.
Or, you could invest that money in fixed increments. Instead of putting $3,000 into the market immediately, maybe you invest $1,000 a month. This is known as dollar-cost averaging.
New investors often wrestle with this decision. Neither option is a bad choice, but there is one that tends to perform better.
Lump-sum investing is usually the better choice
There has been plenty of research done on this subject, so we have an answer on which investment strategy is better. Lump-sum investing outperforms dollar-cost averaging about two-thirds (68%) of the time, according to Vanguard.
Vanguard measured results for each strategy using market data from 1976 through 2022. It compared one-year returns on a hypothetical $100,000 investment. Money was either fully invested from the beginning (for the lump-sum method) or over the first three months (for dollar-cost averaging). It ran 10,000 scenarios, using different asset allocations and time periods.
Vanguard found that "in most historical market environments, investors would have been better off investing the lump sum all at once." This method outperformed dollar-cost averaging by a median of 1.2% to 2.2%, depending on asset allocation.
Dollar-cost averaging is a good alternative if you're risk-averse
Even though lump-sum investing generally works out better, there is a valid reason to go with dollar-cost averaging.
Imagine that you've saved up $10,000, and you invest it all. Then, the market goes into a freefall. It loses 10% over the next few months, and your portfolio is now worth $9,000. Do you panic, constantly check your brokerage account, and consider cutting your losses? Or do you remain calm and remember that historically, the market has always recovered?
If the thought of losing money terrifies you, then you may want to go with dollar-cost averaging. The advantage with this method is that you're more likely to avoid big losses. Even if the market declines after you invest, you haven't invested all your money yet. You'll still have cash you can use to invest at a lower price while the market is down.
Dollar-cost averaging is also a good choice after you've gotten your initial money invested. Investing shouldn't be a one-time thing. To get the best results, it's important to make investing a habit. Since dollar-cost averaging is simply investing a set amount regularly, it's a great long-term strategy. You can likely set up automatic investments through your brokerage or retirement accounts so you don't need to remember to do it.
There's no wrong answer
Lump-sum investing and dollar-cost averaging are both good strategies when starting out as an investor. The difference in performance isn't significant enough to make either the clear best choice, so pick whichever you're comfortable using. The fact you're investing is what's most important, not the method you choose.
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FAQs
Investing all of your money at the same time is advantageous because: You'll gain exposure to the markets as soon as possible.
Should I invest over time or all at once? ›
Investing a lump sum means that you don't have to try to figure out the best time to make periodic investments. You can set up your portfolio and let it grow. A 2021 Northwestern Mutual Life study showed that investing a lump sum generally outperforms dollar-cost averaging over various periods of time.
Is it better to invest in one thing or multiple? ›
Key Takeaways. Investors are warned to diversify their portfolios, meaning that they should never put all their eggs (investments) in one basket (security or market). To achieve a diversified portfolio, look for asset classes with low or negative correlations so that if one moves down, the other tends to counteract it.
Is it better to invest every day or once a month? ›
For many people, the easiest way to step back into the market is to invest smaller amounts regularly, like once a month, every two weeks or even weekly. No matter what the markets do. People who invest regularly are more likely to have a financial plan – and stick to it.
Should you put all your money in investments? ›
Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.
What is the smartest thing to do with a lump sum of money? ›
Start paying off the debt with the highest interest rates and work your way down to the debt with the lower rates. If you cannot pay all your high-interest debt with your windfall, pay as much as possible and focus your attention on other high-interest debt.
Is it better to buy stock all at once or spread out? ›
Investing all of your money at the same time is advantageous because: You'll gain exposure to the markets as soon as possible. Historical market trends indicate the returns of stocks and bonds exceed returns of cash investments and bonds.
Is it worth investing $100 a week? ›
$100 per week adds up to $15,600 in three years
The first thing we need to know is how much $100 per week works out to on an annualized basis. There are 52 weeks in a year. That means that, after a full year of saving, $100 per week adds up to $5,200.
Should I invest $1,000 a month? ›
Investing $1,000 a month for two decades is undoubtedly going to help your money to grow, but the specific amount you'll end up with varies depending on the returns you earn. For many people, it's reasonable to expect a 10% average annual return.
Should I invest $500 a month? ›
Consistency is one of the most essential parts of building long-term wealth. Contributing just $500 per month to a retirement investment fund is enough to get you to millionaire status in time. If you are already contributing that amount to a 401(k) or IRA, you may well be on your way to reaching millionaire status.
Common investing mistakes include not doing enough research, reacting emotionally, not diversifying your portfolio, not having investment goals, not understanding your risk tolerance, only looking at short-term returns, and not paying attention to fees.
What is the number one rule of investing don't lose money? ›
Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule. And that's all the rules there are.”
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Is it better to invest annually or monthly? ›
In a given year, for instance, it is much closer to 50/50 whether a lump sum at the start works out better than splitting it up over the twelve months, and you stand to be better off with monthly investments if the market falls in the shorter term.
Is it bad to buy stocks at all time highs? ›
Bottom line. The stock market at all-time highs is more normal than you might think and shouldn't cause you to deviate from your long-term plan. Take the opportunity to assess your portfolio and make sure it aligns with your goals and risk tolerance.
Should investments double every 7 years? ›
How the Rule of 72 Works. For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72 ÷ 10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double (1.107.3 = 2). The Rule of 72 is reasonably accurate for low rates of return.
Should I invest a windfall all at once? ›
For money you're planning to use soon — for a vacation, a major purchase, or a career break — it's probably not worth exposing your money to the potential volatility of the stock market. If you're going to need it within one or two years, we recommend keeping your financial windfall in a savings account instead.
