So, you’ve had some success and come across a large sum of money? Is it better to invest it gradually over time or invest it all at once? Dollar-Cost Averaging vs Lump Sum Calculator
The never-ending duel between Dollar Cost Averaging (DCA) and Lump Sum Investing (LSI) is a strategic decision most investors face at some point in time. Below, we analyze these two investing strategies with a calculator that tracks and analyses investing results based on your customized parameters.
What Is Dollar-Cost Averaging?
Dollar-Cost Averaging is an investing strategy where you invest the same amount of money on a consistent basis regardless of the asset’s price movement.
For example, imagine you saved up $12,000 and you want to invest in the S&P 500 Index over the next 12 months. By using the DCA strategy you invest $1,000 once a month.
As you can see in the calculator results above, the $1,000 investment every month bought a total of 37.99 shares at an average cost per share of $315.89. A price of $372.17 in December 2020 means you get a return of 17.82% with a profit of $2,137.88.
The DCA strategy ensured you got a distributed exposure to different prices while compounding instead of wasting time trying to figure out when was the best time to invest. Here’s where the famous phrase “Time in the market, not timing the market” originates from.
What Is Lump Sum Investing?
Lump-Sum Investing is an investing strategy where you take your available money and invest it all in the market right away.
Using the same figures from the DCA investing example, imagine you invested the lump sum of $12,000 at once in the S&P 500 Index.
Dollar-Cost Averaging vs Lump Sum Calculator
The calculator results for LSI show how the $12,000 investment in December 2019 bought more shares (38.11) with a lower average cost per share of $314.87 than with the DCA strategy. A price of $372.17 in December 2020 means you get a return of 18.20% with a profit of $2,183.76.
If you invest this money earlier the portfolio experiences more time in the market to compound the returns. In this case the LSI strategy performed better than the DCA strategy by $45.88 due to the moment you invested and the performance of the market. Statistically, LSI outperforms DCA two-thirds of the time. To compare the investing strategies, we use the following calculator to analyze the results:
This is a tool that helps analyze the benefits of the DCA and LSI investing strategies. Enter the inputs for the stock or ETF you want to analyze, the time frame, the contributions, how often you contribute, and even a secondary currency converter to compare currency pairs. Once the inputs are entered, the tool shows the historical data of the asset with the distribution of the contributions that show the portfolio performance.
The results table shows the performance of the investments through time while comparing it to the current market value. There’s a CAGR (Compounded Annual Growth Rate) formula that shows the rate of return achieved per year, and also a separate one to see the CAGR of the instrument to compare how you performed vs the instrument.
Check out this video explaining step by step how to use it:
|Strategy||Dollar-Cost Averaging||Lump-Sum Investing|
|Total Shares Bought||37.99||38.11|
|Average Cost Per Share||$315.89||$314.87|
Dollar Cost Averaging vs Lump Sum Investing Calculator Pros and Cons
The LSI strategy outperformed the DCA strategy by $45.88 – but was it worth it? Factors such as emotion and affordability need to be considered.
Emotion: Investing a lump sum of money can be psychologically distressing. What if there is a sharp crash or a bear market soon after you invest? The DCA approach ensures there is a non-emotional strategy set in place to avoid emotional biases and potential mistakes.
The worst performance in the DCA strategy was just a loss of -$893.16 vs the LSI strategy with a loss of -$3,280.21. Emotional distress was higher in the LSI strategy during the bear market due to the magnitude of the loss. The worst performances in the example naturally happened in the crash of March 2020.
Affordability: The first step to investing a lump sum is to have a lump sum. However, not all investors have piles of cash available to invest. Therefore, DCA investing is a reasonable strategy to apply if the investor has surplus cash available after a consistent paycheck.
Dollar Cost Averaging vs Lump Sum Investing Analysis: Prophet’s Take
Choosing the right investment strategy is an important decision to make. Lump-Sum Investing statistically performs better while Dollar Cost Averaging psychologically benefits the investor.
It is up to investors to assess their personal situations to see which strategy suits them best. We hope this tool helps you analyze different strategies to make an educated decision in the future.
The final objective is to learn how to appreciate the time value of a consistent investment strategy. Learning how to control emotions rationally will improve performance and help investors obtain an unbiased long-term strategy. For more information on DCA VS LSI have a read through our analysis here.