Which Is Right for You?
When it comes to investing a large sum of cash, there are two main approaches – lump sum investing and dollar-cost averaging. Both strategies have benefits and drawbacks. Which one is right for you? It’s wise to consult with your wealth manager before making a decision; however, the following considerations can help kick-start the process.
What’s the difference?
Lump sum investing means taking a large financial windfall, such as an inheritance or bonus, and investing it all immediately. This approach can help you gain exposure to the markets as soon as possible. In contrast, dollar-cost averaging is the process of investing smaller amounts of money at regular intervals over a long period of time. This approach seeks to minimize the downside risk of making a single, large investment.
What are the pros and cons of each approach?
We’ve summarized some of the pros and cons of lump sum investing versus dollar-cost averaging in the table below.
Which is better?
A recent study conducted by Northwestern Mutual found that, over a 10-year period, returns on $1 million invested immediately in the U.S. markets (lump sum investing) performed better than the same amount of money invested evenly over a 12-month period (dollar-cost averaging). Regardless of the investment allocation, the lump sum’s cumulative returns over 10 years beat the dollar-cost averaged returns 75% of the time.1 That’s not to say lump sum investing makes sense for everyone. If you have anxiety about a large market drop following a lump sum investment, are anxious about investment risk or have a shorter investment time horizon, dollar-cost averaging may be a better strategy for you. Whichever approach you’re leaning toward, it’s wise to consult with your wealth manager before making a final decision. He or she can help you evaluate your options in light of your current financial situation, investment allocation, time horizon, goals for the future, risk tolerance and more. For help with your investment strategy, or with any other financial matter, please schedule a call.