What are the advantages of a Lump Sum investment strategy versus Dollar Cost Averaging (DCA)? A comparison of long-term asset performance, the ability to actively time markets, and transaction fees.
All that and more in Episode 44 on the Wilson Wealth Management YouTube channel.
“Assets appreciate over time. So the sooner I invest, the better. Right?”
Yes, investable assets have historically appreciated over the long run. That is a big argument for Lump Sum. You invest 100% on day one, then let the wealth accumulate.
Under a DCA strategy, you may spread out your purchases over many months. The less time you own the asset, the less time it can grow.
Of course, in the short to medium term, markets do experience significant volatility. Which may temper the benefits of investing everything up front.
“Is Lump Sum investing better for investors who like to actively time markets?”
Yes. In the short to medium term, financial markets can be quite volatile. If you possess the market timing skills to exit at short term peaks and reinvest at the troughs, then lump sum works very well.
Of course, the inability for professional money managers to accurately time markets is a key factor in their habitual underperformance versus benchmarks.
We discussed this issue in “Episode 38: Investor Behavior”. Even being out of the market for only the 5 or 30 best days out of 13,870, had a substantial negative impact on asset growth.
“What about investment fees and expenses under a Lump Sum approach?”
Transaction costs tend to be lower under a Lump Sum strategy.
Perhaps you have $12,000. With Lump Sum, you invest everything at once. Most online brokers today charge flat fees, regardless of volume traded. That $12,000 invested in 1200 shares of ABC will cost you (say) $10 in transaction fees.
However, if you spread that purchase equally over 12 months, using DCA at $1000 each month, then you will pay $120 in fees. If you want to purchase $500 monthly over 24 months, fees rise to $240. That can add up in a hurry, especially for smaller investors who may only be able to invest $100 each period.
“Why is there a debate on this?”
Good question.
In the long run, Lump Sum should outperform DCA. It may be preferable for active investors who like to time market fluctuations. And Lump Sum tends to have lower transaction costs, something that is important for investing success.
So why should investors consider DCA?
We will begin that discussion in Episode 45.
To read more on this topic, please refer to, “Why Use Lump Sum Investing?”.
