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DCA vs Lump Sum

If you have a sum of money, should you invest it all at once or spread it out monthly? Under a fixed-return assumption, lump sum almost always wins mathematically because the full amount compounds for longer. But market volatility and psychology matter too.

Inputs

The same amount, invested two different ways.

Both strategies use the same return for a like-for-like comparison.

Assumptions
  • Lump sum: invest NT$1.2M at month 0.
  • Dollar-cost averaging (DCA): contribute NT$10K each month for 120 months.
  • Both compound at 5% annualized.
Results (after 10 years)
Lump sum
NT$1.98M
DCA
NT$1.55M
Balance difference
Lump sum ahead by NT$423.6K(+27.3%)

Under a steadily rising market, lump sum usually wins because the full amount compounds for longer. Real markets fluctuate, so actual outcomes can differ.

Calculation: lump sum = NT$1.2M × (1 + monthly return)^(months); DCA adds the monthly contribution and compounds monthly. Returns are held constant; trading commissions and taxes are not included.

Balance growth

Vanguard's 2012 research: in ~67% of historical periods, lump sum outperformed dollar-cost averaging. But DCA's psychological advantage (easier to stick with during downturns) is real. A balanced approach: invest 50–70% upfront, spread the rest over 6–12 months.

Frequently asked

Which is better, lump sum or DCA?
Vanguard's 2012 backtest: lump sum beat DCA ~67% of the time, because the full amount compounds from month 0. The 33% where DCA won were mostly periods of immediate post-entry drawdowns. Mathematically, lump sum has higher expected value; behaviorally, DCA is easier to execute.
Why does lump sum have higher expected value?
Markets trend up over the long run — every additional month in the market is one more month of expected return. Spreading entry equals 'partly out of the market (earning 0%)' for a few months, lowering the expected outcome. It's an expectation, not a guarantee — actuals depend on whether the market rises or falls right after entry.
When does DCA actually win?
(1) When you don't have a lump sum and salary flows in monthly anyway — DCA is the default. (2) When the psychological pain of an immediate 30% drawdown after lump sum would derail the plan. (3) When valuations are stretched (e.g., CAPE > 30) and a pullback is more likely than usual; DCA reduces timing risk.
What are the common compromises?
(1) 50/50 — invest half immediately, DCA the rest over 6-12 months. (2) 70/30 — lump sum 70% (capture most of the expected value), DCA 30% (psychological cushion). (3) Value averaging — set a target balance per month, buy more when down, less when up. The tool focuses on the first two.
What about retirees with a lump sum from a payout?
Retirees have lower risk tolerance and are more vulnerable to a post-entry drawdown (sequence of returns risk). Use a longer DCA window (12-18 months), or set the target stock/bond mix and DCA only the equity portion. The lump-sum 'expected value' advantage isn't worth the downside risk for retirees.
Does this tool store my numbers?
No. All math runs locally in your browser. Nothing is uploaded.

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