Investing is always challenging because there is no perfect strategy.
Watch this video to find out how Dollar Cost Averaging and Lump Sum Strategy will give different results depending on the market environment!
Lump Sum vs Dollar Cost Averaging Strategy
People often ask me how they should invest their money, and my answer is always the same, that the simplest and most effective way would be invest into a cost-efficient, diversified portfolio. And that they should invest over time, rather than all at once.
Today, I’m going to focus on why we suggest investing over time or what some people call, Dollar Cost Averaging. If you invest $100 every month for the next ten years, that’s Dollar Cost Averaging.
Now I’m going to show you three charts – a declining chart, a U-shaped chart and a rising chart. When you take a snapshot of the market, they will generally look like one of these charts. Let’s compare the results if we were to invest over time versus investing all at once.
Lump sum investing gives you a higher probability of taking part in larger gains but also taking part in larger losses. Read this article to find out how you can make lump sum investing less fearful.
First, let’s look at a declining chart.
Here, we can see that if you have invested all at once, you would have lost about half of your money. If you have invested over time, you’d have done better. You would also have lost money but you would have lost a lot less. The important thing to remember is that this is a temporary loss and not a permanent one unless you need the money or if you panic and sell everything.
Now let’s see how both methods perform in a U-shaped situation.
Here, investing all at once at the wrong time mean that it would have taken you seven years just to break even. However, if you had invested over time, you would have actually made money. That’s because as the market went down, you would have been buying stocks and bonds at cheaper prices so that by the time the market recovered, you would be sitting on a profit.
Now let’s look at a rising chart.
Here, investing all at once did better than investing over time.
Many investors are too fixated on picking the right stocks at the right time. Instead, they should be fixated on their total return after all fees. Investment costs matter and here’s why.
So, investing over time actually beats investing all at once in two out of three scenarios. Over the long term, most markets actually look like the rising chart so there’s a good chance that if you were to invest all at once, you may actually enjoy a better return. At least, that’s if you have really steady emotions and you are able to ride through the ups and downs of the market.
For those of us who don’t have the nerves of steel, invest over time can help us to relax, stay invested and enjoy a successful investment experience.
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