# Retirement: Dollar-Cost Averaging Or Lump Sum Investment?

Feb. 05, 2018 1:19 AM ETSPY15 Comments

## Summary

• When investing for retirement, is it better to invest a large sum of money at once or invest a fixed amount of money at specified times?
• Using historical data from the S&P 500, we can get insight in what to expect when applying these different strategies.
• If investors want to use dollar-cost averaging, which time period is the best one to use?

Sometimes people who are investing for their retirement receive a large one-time sum of money. It could be an inheritance, a company bonus or even some large lottery winnings. Let's just assume that a person who receives such a sum of money wants to invest it into his or her retirement.

There are basically two different strategies:

• Invest all the money right away
• Split the money into a number of equal amounts and invest it on different time periods

Which strategy would be the way to go?

### A simulation using historical data

For this simulation, I used historical data of the S&P 500 (SPY) as found on Yahoo Finance. I took the monthly level of the S&P 500 from 1970 to 2018 to look at the effect of lump sum investment versus dollar-cost averaging for specific periods of time. I looked five different time periods:

• A 1-year time period where 25% of the whole sum was invested every quarter using dollar-cost averaging.
• A 2-year time period when also investing every three months, but with 1/8 every time.
• 3-, 4- and 5-year periods using the same strategy.

I used every quarter of a year as a possible starting point, and from that I obtained a huge amount of data. When comparing these types of strategies with one another, the following averages, maximums and minimums are found:

 Average Max Min Lump Sum (1Y) 9.39% 51.80% -40.09% DCA (1Y) 5.87% 32.72% -32.52% Lump Sum (2Y) 18.58% 75.12% -42.58% DCA (2Y) 10.51% 44.34% -38.36% Lump Sum (3Y) 28.41% 116.00% -38.64% DCA (3Y) 15.21% 62.77% -37.89% Lump Sum (4Y) 39.36% 172.02% -33.13% DCA (4Y) 20.21% 79.60% -36.13% Lump Sum (5Y) 51.17% 197.56% -26.99% DCA (5Y) 25.52% 95.95% -34.12%

From these data, we can already draw a couple of conclusions: