Retirement: Dollar-Cost Averaging Or Lump Sum Investment?

Feb. 05, 2018 1:19 AM ETSPY15 Comments


  • 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:

This article was written by

I am a private investor from the Netherlands in my mid thirties. I have a very long term view and with my own investments I focus on an awkward combination of stable, dividend-paying investments, cryptocurrency, and growth. My favorite holding period is forever, but I am looking for interesting opportunities which might or might not become a success as well. I am writing for Seeking Alpha because I like to share my insights and enjoy the interaction about investing ideas. My writing is mostly about stocks I own, and others I am interested in.I try to approach every possible investment with a great deal of common sense. Every investment has bulls and bears, and I am always searching for a balanced view, which includes aspects of both. I also try to write balanced articles which provide new insights.On the picture you can see my cat, who sadly died a couple of years ago. I like to think that my investing mimics his behavior: most of the time not doing a lot, finding the best places to lie down (enjoying solid dividend-paying investments). But sometimes for a brief period of time he can become very agile and active, just like what I should do when I notice great investing opportunities (though I'm skeptical about market timing).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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