Should you invest a lump sum or dollar-cost average through a turbulent market?

A challenge of de-risking our portfolios is knowing when to re-risk our portfolios. Our fight or flight response likely served our ancestors well (after all, homo sapiens are, according to some scientists’ estimates, part of the 0.1% of the species in the history of Planet Earth to have not yet become extinct1), but it can clearly be a detriment to the balances of our personal accounts. Case in point, investors dumped $1 trillion into money market funds between the middle of March through the end of May.2 Since the middle of March, US equities, as represented by the S&P 500 Index, are up over 18%.3 What do investors do now?

The past is the past. As William Shakespeare wrote in Macbeth, “What’s done cannot be undone.” Investors instead need a plan. Hoping for another sizeable correction is rarely a good investment strategy because said correction either doesn’t emerge or, when it does, investors are rarely in the mood to invest. Waiting for good economic data may not work either, as the market largely discounts better economic activity well in advance. The financial planning industry’s response has often been to recommend dollar-cost averaging, a disciplined approach in which investors divide the total amount to be invested into smaller amounts to be invested over time, rather than in a single lump sum.

Dollar-cost averaging can be reasonable advice that can help psychologically (taking some of the fear away) and behaviorally (giving you a plan to avoid your instincts to run away). It takes a lot of the emotion out of the decision to re-risk a portfolio. However, it is not clear that dollar-cost averaging always produces the most optimal outcome. Consider the case of the global financial crisis. Then too, investors had added over $1 trillion to money market funds, peaking in Q1 2009, and steadily declining in the 6 to 12 months following the Lehman Brothers bankruptcy.4 We analyzed the hypothetical equity returns of five different hypothetical investors reallocating $100,000 into their portfolios one year after the Lehman Brothers collapse. One investor makes a one-time lump-sum $100,000 investment into the equity market. The other four investors invest the $100,000 into the equity market in different increments ranging from $2,000 to $10,000 per month over different periods ranging from 50 months to 10 months. The results are in the chart below.

Figure 1: Lump-sum investing vs. dollar-cost averaging
A tale of five investors: one who invests a lump sum and four others who invest regularly for various lengths of time.

Source:  Bloomberg, L.P. The S&P 500 Index serves as the representative of the overall stock market. Past performance cannot guarantee future results. An investment cannot be made directly into an index.

There are two points to make: 1) Re-risking the portfolio, whether by dollar-cost averaging or by lump-sum investment, proved to be better than not investing. 2) The lump-sum investment outperformed, climbing to over $400,000 by June 12 compared to $279,008 ($2,000 per month for 50 months), $320,995 ($5,000 per month for 20 months), $342,788 ($10,000 per month for 10 months) and $348,637 ($20,000 per month for five months). As usual, it is the time in the market that matters most.5

As investors, our nervous systems were triggered by detected danger. Dollar-cost averaging could be part of the plan to relax our bodies and return us to our long-term investment plans. It’s a fine approach. It just might not be the most advantageous.


1  Source:, 10/19/19

2  Source: Investment Company Institute, 6/10/20

3  Sources: Bloomberg, L.P., Standard & Poor’s. Returns are from March 13, 2020 through June 10, 2020.

4  Source: Investment Company Institute, 6/10/20

5  Source: Bloomberg, L.P. The S&P 500 Index serves as the representative of the overall stock market.

Important Information

Blog Header Image: Milles Studio / Stocksy

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.

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

It is not possible to invest directly in an index. Past performance is no guarantee of future results.

The opinions referenced above are those of the authors as of June 17, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Source Invesco Blog