Lump sum and dollar cost averaging are two different types of investment strategies that both have their own distinct benefits to them.
Many of us are probably familiar with lump sum and dollar cost averaging as investment strategies.
If you’re not familiar, lump sum basically means investing money all at once (hence why it’s called “lump sum”), while dollar cost averaging means investing money in regular intervals over a period of time, no matter the price of the stocks.
So now that you know what both strategies are comprised of, it’s time to dive in to which one is best.
Disclaimer: I am not a financial advisor or expert, so this post should not be taken as advice. This post is purely for educational purposes. Always consult with a professional for advice!
Lump Sum Investing
As stated earlier, we know that lump sum investing is when we invest an amount of money all at once.
So let’s say you have $10,000 that you saved up. You decide that you’re tired of leaving it in your savings account (since you’re barely earning any interest on your money). Now you decide to open up a brokerage account to deposit that $10k.
Congrats, you just invested a lump sum of money!
This strategy works best when you have a lump sum of cash just sitting around losing value. When it sits around for too long (like in your bank account), that’s a good time to start putting that money to work for you by making a lump sum investment into some index funds!
Dollar Cost Averaging
When you practice dollar cost averaging (DCA), you are investing a fixed dollar amount in intervals, regardless of the stock or asset’s share price.
For example, let’s say you set up an automatic deposit of $500 into your brokerage account at the beginning of each month. You don’t change this even if the market is performing poorly. Since this money will be invested in intervals (each month), this is practicing DCA.
This strategy works best when you set up automatic contributions to your taxable brokerage or tax advantaged retirement account. That way, you won’t even need to think about – the money just hits your investment account and you’ll be on your way to building wealth!
My Thoughts
Personally, I tend to incorporate both lump sum and dollar cost averaging into my investing mix as I see fit.
Sometimes, depending on the situation, it may make more sense for me to DCA, and other times it may make more sense to make a lump sum investment.
And I don’t even have a preference – I enjoy investing via both strategies!
Let me know in the comments what strategy you use when investing.