You just received a windfall of cash because you (pick one):
Dumped crypto before everyone else realized it was vapor
Won the Power Ball
Received an inheritance
Took your pilot bonus up front
Loaned the IRS money until April 15th at negative interest
Sat on a bunch of cash waiting for signal of the right time to invest
Whatever the reason, your heart or the season, you may have just stumbled on that signal. Warren Buffet, arguably the most successful modern investor, offers that the best time to buy stocks and bonds is when you have the money. The corollary being that festering about the best time to buy has nothing to do with signals like:
The market is up or down
There’s an election coming
The other party might win the election
A financial pornographer on cable TV is ranting
Your shoeshine boy gave you a tip
The reality is that we should only be investing in the stock and bond markets if we can leave the money in for long periods of five years or more. For retirement investing, we’re usually leaving it in for decades. Over 80% of five-year periods result in positive market returns and all 20-year-plus periods have been positive. Still, the fear of investing only to see a COVID, Dot Com, or Financial Crisis-style market meltdown keeps many of us on the sidelines.
Two Timing Choices
Setting aside “never” as an investment timing option, we really have two choices: Lump Sum Investing (LSI) or Dollar-Cost Averaging (DCA) for how to time the market.
Lump Sum Investing is like a Banzai to a merge clean-up tactic. You go all in from the start. (If that was meaningless to you, try: LSI is like jumping right into the cold pool water.)
LSI is the act of saying to yourself, “Self, let’s just put all the money in the market now and be done with it.” When we LSI, we acknowledge that the market could drop the next day, but it will eventually recover, and we’ll get the outcome we want in the long run. LSI also benefits from extra time compounding in the markets because the money gets into the market and can start earning returns… and compounding those returns. If DCA takes six months to a year for completion, the LSI dollars participate in more dividends and more potential upswings in prices.
Dollar-Cost Averaging is like a Grind tactic. You get multiple iterations to shape any eventual merge and you buy down risk with each effort. (Back to the pool analogy, DCA is like slowly getting into the cold water… toe… foot… up to the knee, etc.)
DCA is the act of saying to yourself, “Self, you will punch yourself if you invest all your money at once and the market tanks, so let’s just invest a little at a time to avoid the regret.”
DCA often gets mixed up a bit with periodic investing which is the act of investing a specific amount out of current income, often each month or each paycheck. They’re similar investing activities, but DCA implies that there’s a non-routine chunk of cash waiting to be invested and the timing of that investment is weighing on your mind.
DCA and periodic investing both suggest that by purchasing shares at varying prices over a period of time, the average share price will probably be lower than shares purchased all at one time.
Which is Better—LSI or DCA?
Vanguard performed a robust study of LSI vs. DCA in the U.S., U.K., and Australia. The results were remarkably similar—about two thirds of 10-year periods saw LSI as the superior strategy by as much as 2%. The study is convincing as long as you believe that stocks and bonds will out-perform cash over long periods and that you have long period to let your money compound. So why do so many of us hang out in analysis paralysis about when to invest our money?
The problem is person in the mirror that you brush your teeth with. S/he has felt the sting of watching an account drop by four, five, or six figures. “If only I’d waited to invest until the market dropped…” But that siren song leads to the long-term return of cash: negative due to inflation.
Even if we like the idea of DCA and spreading the risk of a market drop over a period of months, do we start DCA today? Do we do it monthly, weekly, daily, or randomly? There’s still a timing conundrum.
While the evidence and math tell us that LSI is the superior long-term strategy, our lizard brain has another idea.
A Better Question
Rather than focus on which strategy, LSI or DCA, is superior on paper, perhaps we should ask a better question— “Which strategy is best for me?”
If you’re busy, robotically unemotional, swayed by evidence, or just like the axiom that time in the market beats timing the market, and you will actually pull the trigger and invest to start the magic of compounding on your dollars, LSI is for you. (But you’re reading this article… so why haven’t you done it already?)
If you’ve already completed a lap around the sun ringing your hands about market conditions, telling yourself that it’s just not quite the right time, ruminating about LSI versus DCA or some unknown third option, DCA is probably for you.
DCA can usually be automated so that, once you set it up, you can fire and forget. That’s a great way to hack your own tendency to meander back to analysis paralysis.
Both strategies have been vastly superior to leaving money in cash. You can combine them by investing a partial lump sum followed with smaller DCA investments. You can DCA over longer or shorter periods depending on how that makes you feel. The key is to invest despite any reservations that have been holding you back.
As with most difficult challenges in life, an accountability partner can help. Whether it’s a spouse, friend or financial planner, another person can often help you get past your fears to act. As the wife of one of the greatest fighter pilots in the world once said, “make a decision j*****!” (To be fair she was critiquing my dithering about the Wall vs. Grind, not my investing decisions at the time.)
Cleared to Rejoin
Lump Sum and Dollar-Cost Averaging are both market timing strategies. At some level, every choice to purchase securities is a timing strategy. If you have dollars to invest, it’s great to read and understand the research about LSI vs. DCA. Ultimately, the best strategy is the one you will actually use. Get real with that person in the mirror to make a choice and then get back to what matters far more than when to invest—making the most of the days you have with the people you love!
Winged Wealth Management and Financial Planning LLC (WWMFP) is a registered investment advisor offering advisory services in the State of Florida and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
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“Winged Wealth Management and Financial Planning LLC (“WWMFP”) is a registered investment advisor offering advisory services in the States of Florida and Texas and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WWMFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WWMFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.