Lump Sum vs Dollar Cost Averaging

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Weekly Update

Earnings, earnings, earnings.

In the last few days, we have seen earnings from Walmart, Home Depot, and Target. The numbers from Wally World were good enough as they beat on revenue which drove their stock up 6%. Target on the other hand saw its profits take a hit after dealing with an overstock of inventory.

Home Depot also beat on both earnings per share and revenue. Good for Home Depot, but when I went last week they were missing the PVC fitting I needed (almost made me short it).

We all know stocks are down right now. With this much opportunity, it raises the question as to if you should still be dollar cost averaging or throwing everything you have into the market.

Here is what history says you should do.

Quote

"Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver." - Ayn Rand

Lump vs DCA

(I'm keeping this email short-er)

One of the most mentioned topics on "investing" social media has to be the importance of dollar cost averaging.

The idea of DCA (dollar cost averaging) is that you invest at a pre-determined time interval consistently for years whether the market is up or down. By doing this you ensure you get the best average price over time, and save yourself the stress of throwing all your money into the market at once.

Now don't cancel me for this because dollar cost averaging is great, but according to the data lump sum investing is better.

Let me explain.

Northwestern Mutual Wealth Management performed a study that analyzed the rolling 10 year return on $1 million starting in 1950. The two profiles were lump sum investing, and dollar cost averaging ($1 million invested evenly over 12 months).

For a 100% stock portfolio, the lump-sum approach outperformed DCA 75% of the time.

For a portfolio of 60% stocks and 40% bonds? 80% of the time.

Average outperformance of the portfolios:

• All equity (stocks): 15.2%

• 60% stocks 40% bonds: 10.7%

• 100% fixed income (bonds): 4.3%

So the numbers say to dump it all at one time. From a high level, this makes sense as it gives your dollar more time to compound and we all know how important that is.

The part this study doesn't take into account is emotions, pay schedules, bills, emergency expenses, market volatility, or any of the other bs that happens in life.

Making a single large investment can drive someone's anxiety through the roof. You never know what the market is going to do tomorrow. For example, if you invested $100,000 in the Nasdaq 100 before COVID hit you would have seen a $25,000 loss in value in less than 30 days. Had you been dollar cost averaging, around $10,000/month that big red number wouldn't have hurt as bad, and you would have had cash to buy the dip with all of your friends.

Another thing to consider is that the majority of people get paid every couple of weeks. In this case, the best approach is to dollar cost average according to your pay schedule. Let me be clear. This study doesn't mean you should save up for 6 months and then dump everything at one time. As usual, time in the market is the most important factor.

Conclusion

If you do stumble upon a large amount of cash history says you should invest it all at once. Now forget that.

Invest in a way you are comfortable with. If that's putting 100% of the money into the market at once, great, you are built different as the kids say. If not, develop a DCA strategy that fits your risk tolerance.

It's okay to break the "rules" in situations like this. I won't snitch.

Till next time, Cade.

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Nothing in this email is intended to serve as financial advice. Do your own research. Thanks for reading, if you have any questions, comments, suggestions, etc. about the email send me a DM on twitter. See you soon!