Timing the market is more important than timing the market—but only if you can withstand market volatility.
When you have a large sum of money to invest—say, from a windfall—you're faced with an important decision. Should you invest it all at once (a lump sum investment) or spread it out over time (dollar-cost averaging)? If you're looking to learn the "secret" of investing before you get started, we're sorry to report that there really isn't one. While both strategies have their merits, like everything else in investing, it all comes down to your risk tolerance. Here's what you need to know about choosing between a lump sum vs. a spread .
What is a lump sum investment?
Lump sum investing means investing all of your available money at once, rather than making smaller investments over time. According to Experian, lump sum investing outperforms dollar-cost averaging by 75% for stocks and 90% for bonds.
The reason is simple: The market tends to rise over time. The longer you keep your money out of the market, the more likely you are to miss out on potential gains. When in doubt, there's an old investing adage: "It's better to time the market than to time the market." As long as you can tolerate the volatility of the market—watching your balance rise and fall at different times—then lump sum investing can yield big rewards over the long term.
What is dollar cost averaging?
If you're new to investing or are generally more risk-averse, dollar-cost averaging (DCA) helps avoid the stress of trying to "time the market." DCA involves investing fixed amounts at regular intervals—for example, investing $1,000 monthly for a year rather than investing $12,000 all at once. While it may not maximize returns, DCA minimizes regret if the market drops shortly after investing. Compared to a lump sum, DCA is better suited to investors who receive regular income that they want to invest, or who may panic sell during a market downturn, or who simply prefer a safer, more structured approach.
How to choose your investment strategy
Consider the following factors when deciding between these two investment methods:
Some investors choose a middle ground, investing a significant portion as a lump sum while dollar-cost averaging the remainder. This approach can provide both the statistical advantages of a lump sum investment, plus the psychological benefits of DCA.
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