A woman is leaning over the back of a chair with her face in the palm of her hand.
Investing strategies

How to invest a lump sum of money

Investing a lump sum of money comes down to the question of your tolerance for risk.
4 minute read

Points to know

  • Dollar-cost averaging may spread the risk of investing.
  • Lump-sum investing gives your investments exposure to the markets sooner.
  • Your emotions can play a role in the strategy you select.

The lump-sum approach vs. dollar-cost averaging

Suppose you received a windfall. Someone gave you a gift or you inherited a lot of money. Maybe you hit the lottery jackpot or got a huge bonus.

Here's the question you face: Should you invest it all right away or in smaller increments over time, a strategy known as dollar-cost averaging?

Dollar cost averaging

A way to invest by buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. You seek to purchase more shares when prices are low and fewer shares when prices rise, to avoid the risk of investing a lump-sum amount when prices are at their peak.

All at once ...

Investing all of your money at the same time is advantageous because:

  • You'll gain exposure to the markets as soon as possible.
  • Historical market trends indicate the returns of stocks and bonds exceed returns of cash investments and bonds.
  • When markets are going up, putting your money to work right away takes full advantage of market growth.

Market

The trading of a universe of investments, based on factors like supply and demand. For example, the "stock market" refers to the trading of stocks.

Returns

The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.

Stock

A security that represents part ownership, or equity, in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits, some of which could be paid out as dividends.

Bond

A debt security (IOU) issued by a corporation, government, or government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and make regular interest payments until that date.

Cash investment

Very short-term investments—such as money market instruments, CDs (certificates of deposit), and Treasury bills—that mature in less than one year. Also known as cash reserves.

… Or slow and steady

Dollar-cost averaging may be for you if you want to:

  • Minimize the downside risk of a huge investment.
  • Take advantage of the market's natural volatility by lowering the average price you pay for shares.
  • Avoid feelings of regret if the market takes a downturn after you invest.

Risk

The potential to lose money (principal and any earnings) or not to make money on an investment.

Volatility

 The degree of fluctuation in the value of a security, mutual fund, or index, volatility is often expressed as a mathematical measure such as a standard deviation or beta. The greater a fund's volatility, the wider the fluctuations between its high and low prices.

Share

A single unit of ownership in a mutual fund or an exchange-traded fund (ETF) or, for stocks, a corporation. 

What the research says

Our research indicates that it's prudent to invest a lump sum immediately.*
 

Markets going up …

If markets are trending upward, it makes sense to implement a strategic asset allocation as soon as you can.

History shows that investors taking such a risk have been rewarded with positive returns over the long run that should be greater than the expected return of cash investments.

Asset allocation

The way your account is divided among different asset classes, including stock, bond, and short-term or "cash" investments. Also known as "asset mix."

… But what if they go down?

You may be thinking: What if I invest this huge sum of money at once and the market takes a downturn soon after? What happens to my returns then?

If that's your mindset, dollar-cost averaging may be the strategy for you. In other words, you don't want to have any regrets and you want to minimize the downside risk.

Weigh your emotionally based concerns carefully against what the research shows:

  • The lower expected long-term returns of cash compared with stocks and bonds.
  • Delaying investment is itself a form of market-timing, something few investors succeed at.

Market-timing

An investment strategy based on predicting market trends. The goal is to anticipate trends, buying before the market goes up and selling before the market goes down.

Saving for retirement or college?

Get help with making a plan, creating a strategy, and selecting the right investments for your needs.

Start with your investing goals

Already know what you want?

From mutual funds and ETFs to stocks and bonds, find all the investments you're looking for, all in one place.

Find investment products

Explore professional advice

We offer expert help at the low cost you'd expect from Vanguard.

Compare advice options

Open or transfer accounts

Get started

*Source: Vanguard, Cost averaging: Invest now or temporarily hold your cash? (Finlay & Zorn, 2023).

All investing is subject to risk, including the possible loss of the money you invest.

Dollar-cost averaging does not guarantee that your investments will make a profit, nor does it protect you against losses when stock or bond prices are falling. You should consider whether you would be willing to continue investing during a long downturn in the market, because dollar-cost averaging involves making continuous investments regardless of fluctuating price levels.

Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.

The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.

VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.