Hello BogleHeaders,
I am trying to understand, in simple terms, the pros and cons between investing one lump-sum vs. monthly.
The hypothetical is this: I have $1,200 to invest annually. Option A is to contribute $100 over the course of a year. Option B is to invest the entire $1,200 from the start. Suppose I get a monthly return of 5%.
I tried to do a simple calculation for illustration purpose. It appears that option-b will result in more growth ($2,155 vs $1,671). Is this correct?
month 1 2 3 4 5 6 7 8 9 10 11 12
option a
investment 100 100 100 100 100 100 100 100 100 100 100 100
portfolio 105 205 315 431 553 680 814 955 1,103 1,258 1,421 1,592
gains % 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
gains total 5 10.25 15.76 21.55 27.63 34.01 40.71 47.75 55.13 62.89 71.03 79.59
grand total 105 215 331 453 580 714 855 1,003 1,158 1,321 1,492 1,671
option b
investment 1,200 - - - - - - - - - - -
portfolio 1,260 1,260 1,323 1,389 1,459 1,532 1,608 1,689 1,773 1,862 1,955 2,052
gains % 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
gains total 60 63 66 69 73 77 80 84 89 93 98 103
grand total 1,260 1,323 1,389 1,459 1,532 1,608 1,689 1,773 1,862 1,955 2,052 2,155
Understanding the pros/cons between lump sump vs. monthly investments
- bertilak
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Re: Understanding the pros/cons between lump sump vs. monthly investments
Yes. With investing, the longer the time or the larger the amount the better the likely return. Deliberately holding back on investment is deliberately holding back on returns.
This is straightforward and doesn't need investigation or theorizing to understand. There is nothing that needs to be proven.
This is straightforward and doesn't need investigation or theorizing to understand. There is nothing that needs to be proven.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
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Re: Understanding the pros/cons between lump sump vs. monthly investments
You can't get a 5% return per month. That over the top number results in a hyper skewed comparison. Maybe try 1/12 of 5% for your monthly gain and see what the difference between the two is.
Unfortunately a diversified portfolio doesn't provide reliable monthly results so the exercise is somewhat futile regardless.
If you have the cash at the beginning of the year invest it then. If you don't, invest as it becomes available.
Please see the Wiki on this topic.
https://www.bogleheads.org/wiki/Dollar_cost_averaging
Cheers
Re: Understanding the pros/cons between lump sump vs. monthly investments
In reality, it's a toss up. Market up, lump sum wins. Market down, lump sum loses. One cannot predict what market does on a consistent basis. So do what you prefer, because a few years from now, it doesn't matter lump sum or DCA. It matters that you have money invested in the market.
Time is the ultimate currency.
Re: Understanding the pros/cons between lump sump vs. monthly investments
I can't seem to find a link to the PDF (maybe someone else has it handy?), but Vanguard did research that found lump sum investing outperforms dollar cost averaging 2/3rds of the time. So on average you'll be better off investing everything as soon as you have the money available. However, if you happen to be in that 1/3rd with a particular investment then you might regret investing all at once and that could harm your psychological ability to continue to invest. If you want to follow the math then invest as a lump sum. If you want to follow the behavioral finance then maybe invest over time to the extent that you know yourself and how much you'll regret investing only to see your investment lose value in the short term. Overall, you should invest as quickly as you can without regretting temporary losses enough to keep you from investing in the future.
Re: Understanding the pros/cons between lump sump vs. monthly investments
This assumes a single lump sum. But the question said $1200 annually. This means OP is really asking about multiple lump sum investments. In this case, lump sum wins 2/3 of the time per lump sum investment, but as you add more lump sum investments, the lump sum strategy will become more likely to win.terran wrote: ↑Thu Sep 23, 2021 9:37 am I can't seem to find a link to the PDF (maybe someone else has it handy?), but Vanguard did research that found lump sum investing outperforms dollar cost averaging 2/3rds of the time. So on average you'll be better off investing everything as soon as you have the money available. However, if you happen to be in that 1/3rd with a particular investment then you might regret investing all at once and that could harm your psychological ability to continue to invest. If you want to follow the math then invest as a lump sum. If you want to follow the behavioral finance then maybe invest over time to the extent that you know yourself and how much you'll regret investing only to see your investment lose value in the short term. Overall, you should invest as quickly as you can without regretting temporary losses enough to keep you from investing in the future.
It's like gambling except backwards - you might win one game of blackjack, but you're unlikely to leave the casino with more than you came with if you play many many games of blackjack. In the case of investing, the more times you choose lump sum, them more likely you are to come out ahead.
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Re: Understanding the pros/cons between lump sump vs. monthly investments
The OP was specifically comparing Lump Sum to DCA (Dollar Cost Averaging). 100 per month is DCA not “multiple lump sum” when being compared to $1200 at the start of the year.TrollToll wrote: ↑Thu Sep 23, 2021 11:23 am
This assumes a single lump sum. But the question said $1200 annually. This means OP is really asking about multiple lump sum investments. In this case, lump sum wins 2/3 of the time per lump sum investment, but as you add more lump sum investments, the lump sum strategy will become more likely to win.
It's like gambling except backwards - you might win one game of blackjack, but you're unlikely to leave the casino with more than you came with if you play many many games of blackjack. In the case of investing, the more times you choose lump sum, them more likely you are to come out ahead.
Cheers