Dollar Cost Averaging vs Lump Sum Investing (What to Do With a Pile of Cash)

A friend of mine just admitted to me a big money problem… She has a little over $200,000 in CASH sitting in her checking account! 😳

Hot dang! That’s a lot of moolah!!!

Some of you might be thinking, “What’s the problem? That’s awesome! I wish I had that much in savings!”…  

Well, the problem is, her money isn’t actually invested in anything. It has wicked earning potential, but needs to be moved somewhere so it can take advantage of compound interest. The longer cash sits in her checking account, the more growth she is missing out on!

How to Invest a Lump Sum of Money

My friend is learning about the stock market slowly and knows she needs to make a big investment decision soon… She is considering one of these two options:

  • Invest the entire $200k lump sum immediately into the stock market. OR…
  • Invest the money slowly over time (dollar cost averaging)

Actually, there’s a third option, which is to do nothing and keep holding cash. But, she’s ruled this option out already (and I’ll address why a little later on). 

For now, let’s compare dollar cost averaging vs lump sum investing, contend the pros and cons, and figure out the best option mathematically for her moving forward.

What Is Lump Sum Investing?

A lump sum investment is a complete, once-off transaction to move all available capital into an investment. In my friend’s case, it would be purchasing $200,000 worth of index funds, all at once.

Benefit: The beauty of a lump sum investment is putting ALL your money to work for you as soon as possible. In general, the earlier you invest everything, the more you make in the long run.

Risk: But, moving large sums of money is extremely scary! My friend keeps hearing that “the stock market is at an all-time high.” Her fear is that the day after she invests, there will be a big market crash and she will lose a butt-ton of money.

Not only that, my friend has grown emotionally attached to her cash. It took her decades to save up this amount, and every time she logs into her bank account she feels pride, security, and comfort. She believes all those good feelings will go away if the money goes away.

What Is Dollar Cost Averaging?

Dollar cost averaging (dca) is an investment strategy where you divide up your capital into equal amounts and invest it on a regular basis. In my friend’s case, it would look something like: investing $10,000 per month into index funds for 20 months in a row. $10k x 20 = $200k.

Benefit: Dca investing is an awesome strategy for volatile markets. Sometimes stock prices will be up, and sometimes they will be down, but my friend can rest easy knowing that she will be buying at the average price over the 20-month period.

Risk: Emotionally, this can be like peeling off a Band-Aid very slowly. If stock prices decline over the coming months, she’ll feel like her $10k regular investments are being thrown into a black hole. And if the market rises, she’ll be continually wishing she had invested more money earlier on, at lower prices.

Also, even after 10 full months of investing, my friend would still have $100,000 sitting in her checking account. Her ‘problem’ isn’t really solved fast enough.

Is It Better to Dollar Cost Average or Lump Sum Invest?

Anyone got a crystal ball we can borrow to tell us how the stock market will behave in the near future!!? 🤷‍♂️

Well, we can’t predict the future. But we can look back through past stock market data and see how each strategy would have turned out in years prior.

I’m gonna use this online dollar cost averaging vs lump sum calculator to compare both investment strategies. It will run all the math for us based on historical data over the past 150 years, and tell us which strategy works out better most of the time.

There are 3 inputs needed, and here’s what I’m using for my friend’s case:

  1. How much money is being invested: ($200,000)
  2. How many months if we did a dollar cost averaging strategy: (20 months)
  3. Total amount of years the money will stay invested: (20 years invested this is how long my friend says she has until retirement)

Here are the results:

Out of all the scenarios computed, using 150 years worth of stock market highs and lows, it shows that lump sum investing has been the better option 72.2% of the time.

Not just that, the lump sum strategy has a higher average performance, and higher best performance for the ending portfolio value.

Also, playing around with the calculator, I modified the inputs for the total amount of years invested. Instead of 20 years, I tried lowering to 15, 10, 5, and 2 years… No matter how short or long the investment timeframe, the lump sum investing strategy always has won more than 70% of the time.

Based on this, the investment advice I’d give my friend is: You’ve got a higher likelihood of success dropping your $200k into index funds in one swift transaction.

Your Paycheck: Keep Dollar Cost Averaging!

Quick note… Although the lump sum strategy wins for my friend’s scenario, this is only because she has a massive sum of money saved up! Lump sum investing is only for people with lump sums.

For most regular people, dollar cost averaging is the best strategy with your regular paycheck. If you’re already a dca investor, keep doing what you’re already doing. (If you’re invested in a workplace retirement savings plan like a 401(k), you’re already doing dca — you contribute to the plan every month, and the money gets invested for you every month!)

Should You Wait to Invest Until the Market Crashes?

We’ve determined that my friend should be a lump sum investor, so now the next question is when should she do this?

At the beginning I mentioned a strategy of doing nothing, keep holding cash, and waiting a bit longer until a big opportunity presents itself. But, there are a few issues with waiting for a market crash.

First, there’s been extensive research about trying to “time the market.” It’s almost impossible to predict market timing, especially for a novice investor.

Next, my friend has already been doing this “waiting” strategy for years. Which is proof that it’s not working! Last year in March when the market crashed she was presented with a HUGE opportunity to buy the dip. She wasn’t comfortable investing then, so what’s to say she’ll actually take action next time the market crashes?

All this said, probably the best option for my friend is to invest as soon as possible. Right meow. 🙀

Other Things to Consider When You Have a Lump Sum of Cash

I’m guessing my friend’s not the only one out there with a large checking account balance. Sometimes money comes unexpectedly, like receiving an inheritance, big bonus check, or maybe even a large tax return check.

Before putting all your money in the stock market, here’s a few other things to consider:

  • Got any debt to pay down? Using cash to pay off loans is always a safe move. Your chances of getting a return on your money is 100%. 
  • Double-check your emergency funds: I’ve been using round numbers in my friend’s scenario, but in reality she should leave enough cash left over for her personal emergency fund.
  • Upcoming big purchases, like real estate? If you already have a plan *in the near term* for spending a lump sum, it’s totally fine that it sits in cash for a while! For my buddy, she’s not buying a house anytime soon.
  • Check your risk tolerance! While I think it’s smart to venture outside of your comfort zone once in a while, I don’t recommend making big investing moves that cause extreme stress!
  • Try a blended lump sum & dca strategy: My friend might feel better investing $100k as a lump sum and then the other $100k monthly over a couple years. She can then have a little of both strategy benefits.
  • Chat to a financial advisor: Never hurts to have a professional look at your overall portfolio, asset allocation, investment goals and introduce less risky assets to combat market volatility. 

Have You Helped a Friend Invest?

Figuring out a strategy is only solving 50% of the problem. The other 50% is actually implementing it.

Will my friend pull the trigger and make a $200,000 trade next week? 🤷‍♂️  I don’t know. It’s kind of on her now to make the decision. I can only support and encourage the best I know how!

Maybe you know someone in the same boat? Maybe you’ve been in a similar situation in the past? How would you help and encourage them?

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  1. The Millennial Money Woman March 8, 2021 at 5:44 AM

    Happy Monday Joel!

    What an interesting analysis between lump sum vs. DCA – and honestly, I was surprised to see that lump sum was the better option than DCA! It certainly makes sense though if you have so much cash available to invest. I was hoping that you would say your friend would have invested during the market dip in March of 2020, and since that wasn’t the case, I think you’re absolutely right that she should certainly just start investing asap, because who knows if she will take the opportunity in the future, during another market dip. And, like you said, no one can time the market because (sadly) we don’t have a crystal ball.

    Great article Joel!



    1. Joel March 8, 2021 at 8:30 PM

      It’s really difficult to invest all your cash when the market dips. Especially for a novice investor. Parting with cash is really hard, and it only gets harder the bigger the pile grows I think.

  2. steveark March 8, 2021 at 11:16 AM

    I did receive a large inheritance several years ago. My wife and I invested it immediately as a lump sum into a Personal Capital managed joint account. But now that we are retired we hold several years of expenses in cash to be able to fund our expenses without having to sell into a down market, if and when we have another one. Holding a lot of cash is expensive, but as a form of insurance once you’ve gotten well past your financial independence target it makes some sense to me. I’m kind of on the fence about it to tell the truth.

    1. Adam March 8, 2021 at 11:48 AM

      I wonder about that sometimes. Would it make sense for me, now 41 intending to FIRE at 50, to simply dump all my cash on hand into VTSAX? Even if I did have to sell in a hypothetical downturn in maybe 2032, that far down the road the market will likely never dip down as low as what I’d be spending to buy now. Has a black swan event ever actually wiped out nine years of gains?

      1. steveark March 8, 2021 at 3:03 PM

        I was 100% stocks virtually my entire accumulation period. I only put some in bonds and cash a year or two before I retired. I think with a ten year-ish time horizon you can be pretty bold. But that is easy for me to say!

      2. Joel March 8, 2021 at 8:38 PM

        Hey Adam! I think you’ve got enough time on your side. Having all your cash invested (depending on the amount) could actually shave your timeframe down potentially. 9 years could go down to 8 years.

  3. Impersonal Finances March 8, 2021 at 12:25 PM

    I think DCA with that amount of money is the way to go. While it isn’t as optimal as lump sum, and statistically lump sum wins out, the psychological warfare of lump summing $200k and watching it plummet would be brutal!

    1. Joel March 8, 2021 at 8:39 PM

      Yep, I know what you mean. I’m not really pushing her either way. But I’ll be there to help and support no matter what she chooses, and what happens afterwards. :)

  4. Accidentally Retired March 8, 2021 at 12:41 PM

    Great post Joel. I am wondering if there has been any research on a hybrid model, say 50% lump sum now and 50% dollar cost averaged over 20 months? For me, I figure as long as you are investing that is better than not. The worst thing to do is to hold onto the money in cash for long periods of time and let inflation eat away at it.

    1. Joel March 8, 2021 at 8:42 PM

      There’s probably a way to run models on a blended strategy. But I think the real thing is encouraging her to take action one way or another. Doing nothing only worsens the problem because it’s burning time.

  5. Lonelle C Minesinger March 8, 2021 at 7:16 PM

    My boyfriend also likes to have big savings accounts. I had a hard time but I eventually talked him into investing $80,000 about a year and a half ago. That has grown to over $100,000 and now he is listening to me a little more with putting more in each year. Sometimes its just baby steps with letting go of the security of having the money easily accessible.

    1. Joel March 8, 2021 at 8:27 PM

      Seeing is believing! Great work nudging them and helping. That’s more than $20k he wouldn’t have had if he just kept the cash.

  6. David @ Filled With Money March 8, 2021 at 10:11 PM

    This was one of the most data driven and interesting articles that breaks down dollar cost averaging vs lump sum investing. When I read personal finance articles that relate to investing, I read so much about how important it is to dollar cost average and how it can make you rich.

    They never actually dive into a statistical analysis of what percentage of the time when you actually do win. At a 72% win rate, I’ll take it!

    Like many others though, I wish I had $200,000 in cash just laying around of which I can invest with :)

    1. Joel March 9, 2021 at 9:24 AM

      Cheers David! Well it’s important to note that lump sum investing is only applicable if you actually have a lump sum. Inheritance, stimulus check you don’t need, big commission check, windfall of some sort, etc… (or in my friend’s case, hoarding). But if you don’t have a lump sum, there is no comparison and dollar cost averaging is the way to go :)

  7. Martinus March 9, 2021 at 9:10 AM

    This was a terrific article. Perhaps your best to date. Well done.

    1. Joel March 9, 2021 at 9:19 AM

      Well thanks Martinus! But I can only count it as a success if my friend actually invests her money soon. :)

  8. Jen March 9, 2021 at 8:49 PM

    I’m in this boat with $200k plus cash most of it in 2.23% cds. Its not easy dumping that kind of money in the stock market. I’m hoping our next move will be a place we can afford to buy a house with cash.

    1. Joel March 9, 2021 at 9:16 PM

      Cash is king in real estate. (but it’s also a great time to borrow money with low interest rates).

      Good luck Jen, and I can definitely relate that it’s not an easy decision!

      1. jen March 11, 2021 at 12:08 PM

        Yes, home interest rates are super low. Honestly, would rather buy something cash that is cheap and not worry about owing anyone money. We saved 100k cash by 2017 without that money we would have never bought the house we did in 2017. We would have probably bought something already fixed up with a VA loan (paying a what 5% fee?). Instead we bought a house put 20% down so we didn’t have to pay PMI put the other 50k into the house to fix it up and sold it in 2020 for double our investment. Without that cash I would have never took the risk on that house. So much of finance is mental we all have different thresholds and I lean pretty conservatively. I need to sleep at night. I am a planner and a worrier.

        1. Joel March 12, 2021 at 12:39 AM

          Haha! Great to hear you know your feelings so well and play to your strengths. Self awareness is super important :). Have a great weekend!

  9. Bashy March 10, 2021 at 5:50 AM

    Wow! nice advice. Keep on sharing with us I like this blog.

    1. Joel March 10, 2021 at 9:23 AM

      Cheers and have an awesome week!