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Sometimes It’s Best to Invest a Bit at a Time

It’s no guarantee you’ll make money, but you’ll sleep at night

illustration of dollar cost averaging shows man putting down the same amount of coins at regular intervals on a graph regardless of the graph going up or down
iStock / Getty Images

One of the questions I’m asked most frequently is whether to invest a large amount in the stock market immediately or to do it over time through a method known as dollar cost averaging (DCA).  The answer is complicated, but you’ll generally be happier if you invest a set amount into the stock market at regular intervals — which is the definition of DCA.

Say you’ve come into a lot of money. You may have sold a business or some real estate or, sadly, inherited a sum of money. Let’s use a round number of $200,000, of which you want to put $100,000 into stocks such as a low-cost and diversified total stock index fund.  

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You could put in the order to buy it all today or use DCA. For example, using DCA, you could invest $5,000 a month over the next 20 months. That way, if the stock market goes down, you’ll be buying more at a lower price. Of course, if the market goes up, you’ll be buying shares at a higher price. More on choosing the period of time in a bit. 

I tell people that the mathematical answer is to take the plunge and put the full $100,000 into the market immediately. In the very long run, the stock market is likely to go up, meaning the odds are you will make more money by investing it all now. Therefore, getting to your target asset allocation more quickly is superior. 

On the other hand, I also point out that we humans are not mathematical beings — we are emotional animals. Say you took the plunge today, and tomorrow ends up being the worst day in the history of the stock market. Or even in the beginning of this year before the bear market. Would you stay? Many people wouldn’t. And we know this because research demonstrates we get roughly twice the pain from losing a dollar as pleasure from gaining a dollar. In fact, Daniel Kahneman won a Nobel Prize in economics for this concept, known as prospect theory. With DCA, you don’t have to worry about such a worst-case scenario.

When and how to use DCA

First, I tell people when not to use DCA. If they are getting out of more expensive stock mutual funds or exchange traded funds (ETFs) into lower-cost ones, put it all in now. They are decreasing fees and not increasing risk, so there is no need for DCA. Second, if some of the money is going into high-quality bond funds, I tell them to take the plunge. In spite of bonds having one of the worst years in decades, stocks have lost more in a day than bonds have in a year. 

For people putting significantly more than ever before in the stock market, I will often recommend DCA. That’s because we don’t know how they will behave in a plunge and DCA is a way of getting used to seeing the financial impact markets are having on the person’s nest egg. And there is comfort in knowing that DCA means you are buying more shares at a lower price when stocks decline.  

Picking a period of time to use for your DCA program is an important variable. There is no one answer. I typically recommend periods between one and two years: Less than one is too short, as there may be little volatility, and more than two years leaves you out of the market and in cash for a very long time.

I typically recommend setting up DCA on an automated basis. This can easily be done with mutual funds. Using the same example in the beginning of this piece, you can put in a standing order to buy $5,000 a month for 20 months and then stop. (Funds often call this an automatic investment plan.) Most brokerage platforms don’t allow this for ETFs or individual stocks.  

The reason I like automated DCA is that it will continue unless the investor stops, so it harnesses the power of inertia. I’ve found that when one has to log into an account manually and do it every month, it often doesn’t gets done. Either life gets in the way or we overthink things like a pandemic, an invasion or even a tweet. I tell people that if they do it manually, they must think of it as a binding contract and must follow though.  

Finally, when someone isn’t sure about DCA versus lump sum, I think it’s fine to put half in now and use DCA for the rest. That minimizes regret — if stocks go up, they can feel good about putting half in now, but if stocks decline, they can also feel good about buying some at a lower price. This, of course, makes no sense from a logic standpoint, but as I said earlier, we are emotional beings rather than logical ones.