Debunking Dollar-Cost Averaging

Chart of the Week: Debunking Dollar-Cost Averaging

February 18, 2022

Last Friday’s Chart of the Week got me thinking about the age-old investing question: If you have a chunk of money you want to put in the markets, should you invest it all in one go (in a lump sum) or spread it out over time (dollar-cost averaging)?

To compare the two approaches, I looked at Vanguard’s 500 Index fund since its 1976 inception and compared two investors, each with $1,000 to invest. One put the full $1,000 into the index fund straightaway—our lump-sum investor. The second investor dollar-cost averaged their way into 500 Index, evenly spreading their purchases out over six months. I ran this analysis 540 times, moving the start date forward by a month each time.

Over this roughly 45-year period, the lump-sum investor ended up with more money 72% of the time. Although the average difference in the size of the portfolios between the lump sum-mer versus the dollar-cost averager was a minuscule 2.3%. At times, the differences in ending values were significantly greater, but those times were exceptions and not the rule.

While the numbers might suggest that lumping is a better approach, in reality it discounts the human element. If markets are falling, it’s easier for people to wade their way in than to cannonball into uncertain waters.

The true takeaway from this 45-plus-year sample and the relatively small difference between the average ending account values? Choosing between the lump-sum or the dollar-cost averaging route is not likely to determine whether or not you meet your long-term investment goals. What matters is that you set a plan, stick to it and get invested in the market.

Does dollar-cost averaging work?
Note: Chart shows the percentage differences in ending account values for hypothetical $1,000 investments in Vanguard 500 Index using lump-sum (at the beginning of each period) and dollar-cost averaging (six monthly investments of $166.67) strategies. 540 outcomes are displayed, using rolling 1-month starting periods from Aug. 1976 through July 2021. Sources: The Vanguard Group, Adviser Investments.

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