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.
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.