Invest all at once or regularly?
Updated: Jan 8, 2021
This week I would like to broach the following subject and help you to define which could the best strategy for you. Should you invest regularly or all at once?
Technically, economists call a regular investment strategy the lump sum investment.(which means a single payment made at a particular time, as opposed to a number of smaller payments or instalments). On the other hand, the regular investment is called the Dollar cost average investment.
1. Lump sum investment (all at once)
This table represents an investment of 5.000 USD offering an annual cost average per share of 20 $
2. Dollar cost average investment (DCA- regular investment)
Herewith you observe that If you invest 417 $ each month (5.004 USD / year) you'll reduce the cost average per share at 17$.
Now the idea is to compare this theory with the return of the S&P 500 between 1926 and 2013.
As you can observe, the "lump sum" strategy is clearly the most performing one. But to be complete a Vanguard study shows that during some periods of 10 years they analyzed that for almost 1/3 of the time systematic investment is more efficient.
Stock markets overperform cash on a longer period.Less risk you take, less return you getThis strategy is also available for stocks, bonds and mix allocations
Conclusions, what should be the best strategy ?
If you are afraid about the short term volatility of the markets you'd prefer a regular investment strategy and take advantage of market decrease periods.If your objective is to invest for a longer period and you're not afraid about a short term decrease of the market you'll probably decice to invest all at once. In any case, if you invest all at once, you'll have a higher probability to overperform the regular investment strategy.