Lump-Sum Investing vs. Dollar-Cost Averaging: Revisited

Recapping the Earlier Post

Earlier this month (July 2020) I compared the one-year return of the Vanguard Growth ETF Portfolio (VGRO) ending 2020-07-13 using a lump-sum investing approach versus a dollar-cost averaging approach. I invested a $60,000 inheritance in a TFSA in a single lump sum in mid-July 2019, reinvesting the distributions each quarter. I contrasted that with a dollar-cost averaging approach where the $60,000 was divided into 12 equal investments of $5,000 each month. I assumed that the uninvested balance remained in cash. I also assumed that no commissions were paid, and since it was all done in a TFSA, there was no tax drag on the investment. In a study, Vanguard found that about two-thirds of the time, lump-sum investing beats dollar-cost averaging.


The results in the period ending July 13 included the downturn that began in mid-February and bottomed out on March 23. The outcome was surprisingly close, but this was one of those one-third of the time scenarios when dollar-cost averaging actually came out ahead, although barely. I also tested the result using a hybrid model, where two-thirds of the investment was invested in a lump-sum while the balance was invested in equal amounts over the remaining 11 months.


Testing the Results Against Two Different Time Frames

Since publishing that post two weeks ago, I decided to test the results for the 1-year period ending on the last day of 2019, and also ending on the worst day for the VGRO ETF and for the stock markets of the world in general earlier in 2020, which was on March 23. The following table provides the results.



2019 Calendar Year Results

You can see how close together the returns were for the one-year period ending July 13 (4.83% for DCA vs. 4.72% for Lump-Sum), and how dramatically different the results were for the same approaches for the period ending December 31, 2019 (17.21% for Lump-Sum vs. only 6.84% for DCA). Investing up front was clearly superior in the 2019 calendar year, as the chart below also indicates.



One-Year Results to March 23, 2020 – the Low Point in the Stock Market

The investing period that ended on the low point of 2020 (so far), on March 23, also showed an advantage for lump-sum investing. Lump-sum investing produced a lower loss (-15.76% vs. -18.19% for DCA) as the investor benefitted from the growth over the first 11 months of the period measured, which included reinvesting distributions.



In all cases, as one might expect, the hybrid approach – investing two-thirds in a lump sum, with the remaining one-third invested using dollar-cost averaging – finished up somewhere in between the two approaches.


If you received a substantial lump sum to invest which approach would you take?


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax or legal decisions.


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