Points to know
- Dollar-cost averaging spreads 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.
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How to invest a lump sum of money
Investing a lump sum of money comes down to the question of your tolerance for risk.
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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?
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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 purchase more shares when prices are low and fewer shares when prices rise, avoiding 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.
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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.
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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.
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Stock
An investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.
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Bond
A loan made to a corporation or government in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date. Bonds can be traded on the secondary market.
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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.
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Risk
Usually refers to investment risk, which is a measure of how likely it is that you could lose money in an investment. However, there are other types of risk when it comes to investing.
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Volatility
The degree to which the value of an investment (or an entire market) fluctuates. The greater the volatility, the greater the difference between the investment's (or market's) high and low prices and the faster those fluctuations occur.
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.
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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.
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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.
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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.