Lump sum or monthly investing?

Say you have $12,000 to invest, from a bonus, an inheritance or savings you've built up. Do you invest it all today, or spread it out over the next several months? The research points one way, but your own comfort with risk matters too. Here is how the two approaches compare.

What dollar-cost averaging means

Investor.gov, the SEC's investor education site, defines dollar-cost averaging as investing your money in equal portions, at regular intervals, regardless of the ups and downs in the market. Because the amount stays the same, it buys more shares when prices are low and fewer when prices are high.

There are really two situations people mean by this:

1. You already have a lump sum and choose to feed it into the market bit by bit instead of all at once.
2. You invest from your income as you earn it, such as a fixed amount from every paycheck into a 401(k).

The first is a choice. The second isn't really a choice at all, since you can't invest money you haven't earned yet. Most of the debate is about the first situation.

What Vanguard's research found

In February 2023, Vanguard published a paper titled Cost averaging: Invest now or temporarily hold your cash?. The authors compared investing a lump sum immediately with splitting it into three equal parts invested a month apart, then measured wealth after one year on a rolling basis.

Key findings:

• Using MSCI World Index returns from 1976 to 2022, lump-sum investing beat cost averaging 68% of the time.
• Cost averaging still beat holding everything in cash 69% of the time.
• The paper reports similar results across markets including the United States, the United Kingdom, Australia, Canada and the European Union, and in simulated returns.

The paper ties this to a simple fact: from 1976 to 2022, US stocks beat cash 76% of the time and US bonds beat cash 68% of the time. Money held back in cash, even briefly, tended to miss out on those higher returns.

The paper also notes the trade-off. Lump-sum investing produced bigger losses in the worst scenarios, while cost averaging temporarily lowered risk by holding some cash. Vanguard concluded that cost averaging might suit investors with very high aversion to risk and losses who might otherwise leave the money entirely in cash, and suggested keeping the period short, such as three months.

As Vanguard's paper states, past performance is no guarantee of future returns.

A hypothetical comparison

This example is for illustration only. It is not a prediction, and it doesn't reflect any real investment.

Assumptions: a steady 6% annual return, compounded monthly (0.5% a month), no fees or taxes, and a 10-year horizon (120 months).

• Lump sum: invest $12,000 today.
• Monthly: invest $1,000 at the start of each month for 12 months, for the same $12,000 in total.

Lump sum after 10 years: $12,000 × 1.005^120 = $12,000 × 1.81940 = $21,832.76

Monthly over the first year, then left to grow: Each $1,000 grows for a different number of months. The first grows for 120 months, the second for 119, and so on down to the twelfth, which grows for 109 months. Adding all 12 together gives $21,245.14.

Difference: $21,832.76 − $21,245.14 = $587.62 in favor of the lump sum.

With a steady positive return, the lump sum always wins, because every dollar is invested for longer. Real markets don't move in a straight line. If prices had fallen sharply in the first few months, the monthly approach would have bought more shares at lower prices and could have come out ahead. That's exactly the scenario that makes people hesitate, and it's why Vanguard's result is "about two-thirds of the time," not "always."

The behavioral side

The numbers favor investing sooner, but a plan only works if you stick with it. Questions to ask yourself:

• How would you feel if the market dropped 20% the month after you invested everything? If you would sell in a panic, spreading it out may help you stay invested.
• Is the alternative leaving it in cash indefinitely? Vanguard found cost averaging still beat staying in cash most of the time. A short, scheduled plan is better than waiting for the "right" moment.
• Can you automate it? If you choose to spread it out, set up automatic transfers on fixed dates so you don't end up timing the market by feel.
• Do you need some of the money soon? Money you'll need in the next few years, such as an emergency fund, may not belong in the stock market at all.

Most people already invest monthly

If you contribute to a 401(k) or similar plan through payroll, you are already investing a fixed amount on a regular schedule. For most people, the more important questions are how much you invest each month and whether you keep going through ups and downs.

Here's a hypothetical example with the same assumptions: investing $500 at the end of each month for 30 years (360 months) at a steady 6% annual return compounded monthly.

$500 × [(1.005^360 − 1) ÷ 0.005] = $502,257.52

You would have put in $500 × 360 = $180,000. The other $322,257.52 is hypothetical growth. Real returns will be different, and could be lower, but the example shows why starting early and staying consistent matters.

How SpendySaver helps

The Retirement planner calculates the future value of a lump sum or of monthly investing, so you can try your own amounts, time frames and return assumptions side by side. It can also show the monthly investment needed for a target retirement income. SpendySaver doesn't invest money for you or recommend specific investments, and its results are estimates, not guarantees.