Dollar-Cost Averaging vs Lump-Sum — First Portfolio Builder

§ 01

Approach	What it is	Best for
Lump-sum	Invest it all at once	A windfall you already hold and won't need -- maximizes expected return
Dollar-cost averaging	Invest a fixed amount on a schedule	Money arriving each paycheck, or calming nerves about one big deposit

§ 02

Two situations get confused. (1) A windfall you already hold: lump-sum wins ~2/3 of the time. (2) Money arriving every payday: you are dollar-cost averaging by definition, and that is exactly right -- you invest as you earn. DCA-ing a windfall trades a little expected return for peace of mind, which is fine if it keeps you invested. (Ties to pf-2: time in the market beats timing the market.)

§ 03

If you have a lump sum and investing it all at once would keep you up at night, split it over 3-6 months -- not 24. The behavioral benefit fades fast and the opportunity cost grows the longer cash sits idle.

§ 04

Dollar-cost averaging is the price you pay to show up every month without flinching -- and for most people that price is worth it. The worst outcome is not 'lump-sum vs DCA'; it is sitting in cash, paralyzed, while inflation quietly erodes it.

§ 05

You just received a $20,000 bonus you won't need for 15 years. What does the evidence favor?

§ 06

The dread of investing a windfall right before a drop is loss aversion -- losses sting about twice as much as equal gains feel good. Behavioral Finance module bf-3 (Loss Aversion) unpacks why, and why dollar-cost averaging a windfall is often a fee you pay for peace of mind rather than a better return.

Five questions · AI feedback

Sit with the ideas.

Vanguard's research found that investing a windfall all at once (lump-sum) beat spreading it out (dollar-cost averaging) about two-thirds of the time. Why?

Why:

Sit with the ideas.

Other lessons in this course.