Lump Sum Investing vs Dollar Cost Averaging When Stocks Are Expensive

We know that dollar cost averaging (DCA) underperforms lump sum investing (LSI) about two-thirds of the time. That's because stocks tend to go up more often than they go down. But does LSI beat DCA when stock market valuations are high compared to historical averages, as they are now? That's the question we cover in this video.
Join the newsletter: robberger.com/newsletter/?utm...
------------
Video Resources
------------
Vanguard Study: www.smartretirement.com.au/wp-...
Of Dollars and Data Article: ofdollarsanddata.com/dollar-c...
Shiller PE (CAPE): www.multpl.com/shiller-pe
Jon Luskin Paper: jonluskin.com/wp-content/uplo...
Wade Pfau Paper: www.financialplanningassociat...
------------
Investing Tools
------------
My Book (Retire Before Mom and Dad): amzn.to/2MsRJ9B
Personal Capital (Investment Tracking, Retirement Planning): robberger.com/personal-capital
New Retirement (Retirement Planner): robberger.com/new-retirement
Stock Rover: robberger.com/stock-rover
M1 Finance $30 Bonus (IRA & Taxable Accounts): robberger.com/m1finance-bonus
------------
Credit Cards & Banks
------------
My Favorite Credit Cards: www.allcards.com/best-credit-...
My Favorite Online Banks: www.allcards.com/best-online-...
------------
Popular Videos
------------
1️⃣ How to Create a 3-Fund Portfolio: • How to Create a 3 Fund...
2️⃣ How I Manage 28 Accounts in One App: • How I Manage 28 Financ...
3️⃣ 7-Step Financial Checkup: • A 7-Step Annual Financ...
#dollarcostaveraging #lumpsum #robberger
ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
LET'S CONNECT
KZbin: / @rob_berger
Facebook: / financialfreedomguy
Twitter: / robert_a_berger
DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.
AFFILIATE DISCLOSURE: Some of the links on this channel are affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase and/or subscribe. However, I only recommend products or services that (1) I believe in and (2) would recommend to my own mom.

[@alex182618]

My comment was deleted. What I was trying to say was that very few people invest lump sum. If someone invested a lump sum in December 2021, he would be very nervous for the next two years. It is better to invest a certain sum every month to be calm and to build up a behavior pattern. Those who conduct mentioned studies, take no consideration of behavioural patterns. I am sure most brokerage accounts were built by dollar cost averaging, not lump sum. That is how 401 k works.

[@rob_berger]

Not sure how it was deleted (I didn't delete it), so thanks for reposting. Also, those studies to discuss the behavioural side of the equation. Agree with you that it is an important factor to consider.

[@kevinmorris7285]

I do lump-sum for my Roth every January, but my 401k is dollar-cost every paycheck.

[@TonyCox1351]

Technically, investing every paycheck IS lump sum investing - you’re investing the entire lump sum as soon as it’s available (most people don’t have the money to do their annual investments all up front)

[@joshuamorris3364]

​@@TonyCox1351I've setup my checks and investments to auto withdraw on the daily/weekly frequency. Instead of all of it per check being taken out, the DCA of my set up mitigates a small amount of risk (the stocks I'm in are medium to low mkcap) so the swings of ±3% over a few days would be a bit more exaggerated if I wasn't getting in on the low days. It's automatic though and I don't look at the stocks when I place the purchase. I just make sure it doesn't buy above my margin of safety bounds

[@supersteve8305]

I just do it how I want and don't worry about it. It's worked so far.

[@JBALLMORE]

I love your newsletter Rob!

[@MonteRosa849]

As always an extremely helpful report Rob! Thank you very much!

[@fhowland]

Fantastic video! You’re one of the best KZbin finance channels I’ve found. Very data based and rational.

[@kw7292]

News letter is always good. This past week it was exceptional. I-bond info was spot on!

[@keithp5568]

Thanks for another great video! The set rotation looks great!

[@danielhass4812]

I put a large lump sum in Jan 2021. Really struggled with the decision of dollar cost averaging Vs lump sum. Wish I would have averaged it over 12 mo period

[@philruehlen]

Another great video Rob !

[@likethesky]

Rob, a super timely and interesting topic!! Love these more advanced topics. I’m a huge Wade Pfau fan too. Looking over his paper and thinking about stocks and bonds vs stocks and cash-two very different things of course (even with short term money mkt rates ~ 4.5% right now), leads me the question of bond and stock correlations that have arisen (if I’m recalling correctly, over the past couple of decades), and so it would be great to think about Graham + Dodd in regards cash vs bonds given the pattern of the latter’s current correlations with equities. Anyway, keep up the excellent content!

[@fredf.3769]

Most of us have to us DCA. I never had the money to do lump sum. I made contributions to my 401 k every payday and did okay.

[@ld5714]

Thanks Rob. Great info and discussion around this topic. Appreciate all you do. Bakersfield, Ca.

[@pgreenx]

Studies have proven a lump sum is almost Always better but $cost avg makes people feel better.

[@Davidstowe872]

Completely disagree. Some of your logic is incorrect. You said DCA would lose you money because the market tend to go up. That's just mathematically wrong. You don't lose any money, you just gain less than if you put all the money in at the start. The point of DCA is to reduce risk, but at the cost of reducing gain as well. It's good for volatile stocks where price fluctuate 15 to 30% a week like Tesla for example. If you dump all your money at the peak of TSLA stock, you might see a loss for months. DCA would guarantee you make steady gain.

[@cwsrealfan]

Thanks for this video. Timely for me as well. I am a DCA guy by habit but when I next have the opportunity, I plan to lump sum. The data is clear.

[@michaelevans5328]

The new backdrop looks great! That CAPE chart caused me to dollar cost average an inheritance in 2021. That decision cost me a lot of money, but I don’t particularly regret it. In general, valuations play a role, but a small role, in my decisions. Another super video!

[@JonLuskin]

The challenge about using market valuations (CAPE, etc.) in the decision to dollar-cost average or not is that although valuations are high, there's nothing to say that they couldn't go higher.

[@michaelevans5328]

@@JonLuskin Thank you! I'm fairly confident that my decision whether to lump sum or DCA is 100% predictive of what the market will do ;)

[@michaelevans5328]

Namely, the opposite.

[@jasonhobbs2405]

Great stuff!

[@JonLuskin]

Thank you for sharing! 🤓

[@alessandrosavino1431]

Hi Rob, it would be great to have a video about glide paths, and their pros and cons. I naively assumed a declining path was a relatively obvious choice, but clearly there's more to it :)

[@likethesky]

Alessandro, definitely not as you approach and pass through your chosen retirement age! Wade Pfau writes eloquently about this topic and I’m sure if you dive into more of Rob’s videos you will discover he makes this clear too. Essentially, the very riskiest time for a retiree is the exact moment they retire (stop drawing a steady salary) and the risk then lessens over time-assuming all else stays constant-so the thinking is one should get quite conservative as one approaches retirement and then after the moment of retirement at one’s peak conservativeness, then start to add more risk (this is simplified for the case where you’re not as concerned to leave an inheritance for others, iow, a legacy, but assuming your heirs are much younger than you it still roughly holds).

[@Ravencroft81]

I lump sum invest every month. 😅

[@inertiaforce7846]

Damn straight.

[@alleneverhart4141]

Great video Rob and very topical for me. Do any of your studies evaluate DCA/LS while the Fed is raising rates vs. reducing rates?

[@JonLuskin]

Fascinating question! One could look historically to see what had happened in the past. Of course, that's no guarantee for future returns. 🤓

[@FreeCryptoClass]

Trying to time the market isn't my style. I don't have that many active brain cells left, Lol. Your spreadsheet really opened my eyes. I can't believe the spread was so low. You can DCA daily, weekly, bi-weekly, monthly, or even yearly. DCA protects us from our own emotions.

[@francesconesta6058]

The problem of DCA vs lump sum is that all of these studies make conclusions on an average analysis of multiple instances of choosing between DCA and lump sum, and over a long period of time. However, as individual investors we probably have one or two occasions to make this choice. These analysis do not tell us what is the risk we would take in those circumstances. Is it more worth the risk to see a big crush after lump sum or see your portfolio growing less because making DCA vs lump sum? I think the two risks are quite asymmetric and cannot be considered the same. If I had 100 lump sums and I had to make this choice 100 times then I would just trust the law of large numbers in statistics and make lump sum. Think about, this is exactly what we do with DCAing our paycheck. But if you get a big bonus or inheritance, I would prefer to be a bit more strategic and look at evaluations and global market trends. Even if this in a long run might matter less, the psychological downside is too big to be neglected.

[@marthas8108]

Thanks! I may inherit a small but not insignificant amount and am trying to figure out how to handle it. Your comments are helpful, if not prescriptive. Much appreciated.

[@alexgrant11]

Wow, I am in the position you are speaking about! Leaving a managed IRA and moving back to Vanguard ( msot likely self directed). Vanguard offers a managed .03% fee which isnt bad. Please speak more on this if you can, Im normally an all in person too, however, with the upcoming "reset" and looming recession... much like the old bucket system, I think we need to think in these new times, new ways to invest (or hold cash, not speaking of market timing, I believe the time may be be patient in cash). Look foward to hearing your podcast. Sent it to all my family and everyone I worked with in the fire service. Good health.

[@josh9231]

Thanks Rob for doing a video on my email 👍

[@2112_WorkingMan]

Thanks Rob -perfectly timed video for me. Some money on sidelines, but hesitant to give up 4+% guaranteed cash return against lump sum market return should we enter a recession. That said, I set some S&P buy points to DCA in should they occur.

[@skeelo221]

I'm in the same boat!

[@alexgrant11]

90 % VOO is my set return buy with 10% treasuries

[@hardykornfeld1733]

My employee benefit retirement accounts have been dollar cost averaging through pay period based asset purchasing continuously since 1987 (I’m 70 and haven’t quite managed to retire). So information on prolonged DCA outcomes is of interest.

[@robertryan2400]

question: where was the cash sitting while it was being titrated via DCA into equities? Was it returning 4.5% that Monery Markets provide now? Wondering how that affects the outcome, like in an inheritance situation.

[@alexgrant11]

Read SECURE ACT on inheritance changes, no grand fathering

[@dreamlifedividends]

​@alexgrant11 That wasn't the question. Earning a higher rate on sideline cash vs lump sum while you DCA into the market. How would that skew the results

[@frankb1]

Thanks!

[@mikephilpot9857]

I stick with lump sum. Ben Felix researched this topic on the Rational Reminder Podcast. Lump sum usually wins. Using valuations did not help investors pick timing to use DCA.

[@alexgrant11]

This isnt usual times, many managers have no clue to what to do in the next quarter

[@mikephilpot9857]

I understand, but imho, there isn’t a “normal” time, ever. We get a unique sequence of returns as we go through time. We can never know what will happen in the future; so, we just have to play the odds. So, I prefer to use lump sum. Any other strategy is just market timing, and I believe that won’t give me the best chance for success. If DCA helps someone get over fear of investing, then that’s great, but I don’t have that fear; so, I’m lump sum all the way. 😁

[@jamesmorris913]

On this debate-topic, I think the best explanation I ever heard, was from LONG ago; when the great Peter Lynch, was a guest on Louis Rukeyser's "Wall Street Week", where he said, "If it's at least ten year money, there's unlikely to be any better place to have it, than in the U.S. stock market". I have never forgotten those words, and (for the most part) have deployed my overall investment strategy, accordingly..and I'm EXTREMELY satisfied, with the overall results! I simply look at a every investment that I put into VTSAX, as the equivalent of buying a 10 yr. C.D!

[@davidlemmon4603]

I’m convinced that the reason the market is so overvalued is because so many people are automatically buying index funds through their 401k… there are too many buyers for a finite amount of stocks which artificially elevates the stock price.. more buyers drives up prices.. my hypothesis is that as more pensions continue to die, and more people open 401ks, then the market will get even more expensive..

[@markmonaco70]

I hope your right

[@TheFourthWinchester]

Yep. And the returns will suffer massively.

[@coppcar]

With a CAPE currently at 34.41 I won't be DACing anything. Thanks for mentioning this. I'm waiting to put money in from a Roth conversion, but it ain't happening until there's a sale.

[@pranaliu6185]

In general when you are wondering how to invest, would you accurately be able to identify that the market is overvalued? Partially because I guess value(ation) is determined by the p/ the market is ready to pay over the period you want to invest

[@AbcDino843]

Do these comparisons mean less when we don't know the exact entry points for lump sum investing? Are the studies saying that it doesn't matter which entry point is chosen, ie. even if you enter the market at the highest point?

[@MiserableLittleDoomGoblin]

I was listening until I saw the Rom #1 comic on your bookshelf. Then I lost all focus. 😅

[@krisskogs2532]

Wondering how money market returns impacts analysis. Right now cash is returning 4.5% risk free. Also, I would be very interested in a similar analysis but instead of P/E ratio, look at whether the Federal Reserve is raising rates&QT or lowering rates&QE.

[@hc3550]

4.5% is still losing to real inflation 😂

[@BerserkingGator]

Hey Rob how are compounded gains taxed down the road? Say around when I retire I sell 20% of my portfolio, what would this process look like? Thank you for the great information.

[@xst9880]

CAPE Ratio (Source: YCharts) Date Value February 28, 2023 30.38 January 31, 2023 28.81 December 31, 2022 28.46 November 30, 2022 28.46 October 31, 2022 27.08 September 30, 2022 28.23 August 31, 2022 30.70 July 31, 2022 29.00 June 30, 2022 29.05 May 31, 2022 30.67 April 30, 2022 33.89 March 31, 2022 34.27 February 28, 2022 35.29

[@ismailkirac6399]

Please make a video about emergency fund.

[@phd_angel4192]

The question is not "when stocks are expensive", but rather when the market is *volatile*, as it has been the case since 2020. More specifically (April 2023), is to ascertain whether the market has already priced in future recessionary trends, meaning that, instead, stocks are actually more affordable. Quick question, how are you defining "lump sum"? It contradicts your reco to regularly invest as much as you can...

[@no_more_spamplease5121]

He means when you suddenly receive a big lump of money and now have to decide what to do with it.

[@shy_gamer]

Looking at the historical cape ratios, most of my 6 figure CDs were invested in VTSAX in 2021 and 2022 when the ratios were well above 30. Could anyone have worse luck?

[@mjs28s]

Why do people use the Shiller PE ratio? Hasn't it kept people out of the market during some of the best times to be in? when many articles or videos refer to it they act as if the Shiller ratio being much over 15 means overvalued market. If you look at the Shiller PE chart, look at how many great returns one would have missed out of by not investing because the shiller ratio was 20, 25, or 30.

[@barbaraperry2796]

Interesting

[@jamesjensen5000]

Bob, I am interested in your opinion on issue of state run North Dakota Bank founded in early 1900’s to fund farmers in the state, chaired by governor, non participation in FDIC , wholesale source to local community banks , profitable every year since 1917, profits can go to state general funds or infrastructure projects, does not compete with local banks in state for credit cards, buys loans from local banks on case by case basis…. Is it a model to consider for other states?

[@canaanalbright537]

Is now a good time to allocate more to bonds in your M1, 6 fund portfolio?

[@WhiteBoardFinance]

I’m a DCA guy by habit but just did a video on this and the data is clear lump sum outperforms a majority of the time!

[@dnah02]

I dollar cost average the other day I saw more sales I sold some ETFs I did not like any more and bought additional shares of SCHD and vym

[@imsteveb]

Great video! We seem to be in new territory compaired to the last 100 years+. It seems the new norm is inverted yeild curves, Schiller PE over 30 (Currently 34.71 in May 24). It seems like a lot of experts are having a hard time making decisions (predictions) based on the old ways of examining data. Is this time different ? 😀

[@billcarruth8122]

Essentially this seems to boil down to: the more that stocks are over valued the more you should just sprinkle some money in. If you take it one step farther and look at it from a real world investor point of view rather than a blind statistics analysis, sprinkling some money in when things are over valued will increase your odds of having a high ratio of cash when a major down turn happens, which is generally a great opportunity to switch gears and lump sum the rest when the market forms a bottom.

[@wacoharder]

This is probably a wrong deduction, but it appears that the SP500 took appropriate 12 years to recover and exceed where it was before the Dotcom bust. So can one assume that if the current bear market we’re trying to come out of repeats, our 70% in VOO won’t increase past the amount we had 12/31/2021? I’m retired and not adding any funds to retirement except dividends auto reinvested.

[@kw7292]

What about dollar cost vs lump sum when cash is paying 4 to 5 percent?

[@marilewis2913]

How are all of these theories affected when the DOLLAR COLLAPSES???? Also, what is the Schiller PE value over next 15 years currently sitting at?

[@sergiosantana4658]

The type of market cycle you are in should be a factor in the lump VS. dca decision . example If you are in a secular bear market you would take full advantage of the correction by going into the market 100%(lump sum) An the opposite applies if you are in a secular bull market then you can dca into the market as you buy equitys on sale as the prices revert back to the mean. .

[@dinkle5813]

Is it a question of momentum? Very high cape indicates stocks have been high and likely will continue for a period of time

[@OffGridandOutdoors]

It seems like we are WAY over valued right now.

[@montyloads]

Genuine question - Would you lump sum in todays market into a global index fund with the s&p at all time highs and some analysts predicting a recession which is around the corner? Or would you hold out for a while?

[@samvannoort7137]

Comparing historical p/e’s like this doesn’t make much sense without: (1) accounting for differences in interest rates; and (2) adjusting for the fact that GAAP accounting standards overestimate p/e ratios for companies that heavily invest in R&D and intangibles, which under GAAP principles have to be fully expensed in the year that they are made as if they have 0 long run benefit (types of investments that are now much more prominent than in the past, particularly among the largest companies in the S&P500). Not making a claim as to whether markets are currently overvalued or not-I don’t know-but these adjustments would make the current market look a lot cheaper as compared to past markets.

[@Milhouse77BS]

My advisor lumped summed me in stocks last Jan. Didn’t work well for me.

[@rob_berger]

FWIW, I would have done the same thing with my own money if I had a lump sum back then to invest.

[@p.c.h.6721]

In January March-April of 2022 I sold everything, then invested everything I had back in October-November, I have just sold everything again, this time I have a feeling that I’ll have to wait quite a bit to get back in, we will see, but getting in and out with everything I have so far so good

[@Eric-wc7lx]

So the Shiller chart basically shows that, unless around the Great Recession, US equity markets have been over-valued since 1995. However, because the market stayed consistently over-valued, buy and hold index investors made money. Let’s hope US markets don’t revert to the mean, or American private retirement plans all completely fail.

[@elmayo1665]

I've watched quite a few of these videos now and it's clear that lump sum generally wins. I'm curious though, I assume that if your using DCA, the remaining money stays out of the market entirely earning 0%? What if one places the lump sum into a fixed income index earning roughly 5%, then DCA's it into a 100% equity indexes over a roughly 12month period. Lump may still win, but I feel that it would skew the test results more in favor if DCA?

[@rokolczuk]

Hey, so I'm wondering what did those studies assume is happening with the money that is waiting to be invested using DCA? Imagine that one wins $100.000 in a lottery and chooses to invest 10k a month while investing the rest in short term debt or money market. That person would still make profit on univested money in s&p500 in this case.

[@canaanalbright537]

I am curious, what about dollar cost averaging over 6 months? Or shorter time?

[@fadisalem2710]

The way I look at it, although you maybe putting in a one time lump sum of money into the stock, especially when it's a lot of money, so anyway if the stock you invested in pays out dividends which normally they do that quarterly and then you reinvest the money back into the stock, actually which in a way its like your dollar cost averaging. Because every few months whether the stock is up or down you're still getting the dividends just every few months to put that money back into the stock market for as long as you'd be investing in your lifetime if you know what I mean.

[@JonLuskin]

I did look at shorter periods. You really need to DCA over a long-time if you're planning to do so based on market valuations. That's to say, markets are so volatile that's there's not much of pattern to DCA'ing over a short-period - if you're doing so because valuations are high. Yet, as already mentioned in another comment, even then, results aren't guaranteed. Just because valuations are high, doesn't mean they can't go higher. 🤓

[@canaanalbright537]

@@JonLuskin Thanks for the comment! I appreciate the feedback.

[@QuadTap]

Today Cape is 33 and cash(SGOV) is paying 5%... DCA 12-24 months is likely to beat lump sum

[@danielb3863]

DCA= Sleep well Lump sum= sleepless nights.

[@crimsonpirate1710]

Agreed

[@inertiaforce7846]

DCA beat lump sum from the year 2000 to 2010. 2000 was the tech bubble that burst. 2008 was the Great Recession. Anybody who had lump summed in 2000 would have vastly underperformed a person who had dollar cost averaged over that 10-year period. DCA minimizes risk for this reason. Who's to say in the future something can't happen like this again for another 10 year period or better yet for a 20 year period. Since the future is uncertain and unknown, DCA seems to be the safer bet even though it may not generate as high of a return. Personally I have done a combination of both where I did a partial lump sum. Overall, however, I would prefer to DCA.

[@dmoon9037]

Value Averaging; Micheal Edleson.

[@ScoobieDoo-zy1rh]

Instead of dollar cost averaging maybe talk about dedollarization and how that affects the little guy.

[@thoryan3057]

Wrong youtube channel for that buddy.

[@ScoobieDoo-zy1rh]

@@thoryan3057 probably. It seems to me that it * May be pointless to talk about personal finance if it will become impossible to retire in the future .

[@magalengo]

Buy a collection of highly profitable businesses, then hold no matter what. The human animal loves to over complicate a proven strategy.

[@alexgrant11]

Hi Warren !

[@kkovler1]

lump sum investing always works after a stock market market crash! If you have the patience to wait!

[@HamiltonRb]

Respectfully, you are trying to time the market. You say after a crash, and I say how big does the crash have to be, and how do you know it doesn't have a couple more crashes right behind it, like 2009? If I have money to invest, I invest it

[@haldriver1378]

​@@HamiltonRb with decent returns, for now, on Treasury bills, why risk enduring 3 crashes in a row? Because "the market always comes back"? Not everyone finds risk to be so appealing.

[@kkovler1]

@@HamiltonRb Just remember it's not time in the market that creates the most wealth it's timing the market!

[@HamiltonRb]

@@haldriver1378 Thats a fair observation and I can only suggest to you that I am 71, been fully invested since about 1985, and have been through many corrections and never sold. My portfolio consists of 24 big blue chip stocks in Canada and the US, that Im pretty sure will be around long after Im having a dirt nap. In addition I hold one low volatility etf on each side of the border ZLU in the States and ZLB in Canada, and if you look at the long term chart on each, they are pretty comparable with the major indexes, without the wild swings, and frankly I sleep like a baby

[@likethesky]

@@kkovler1 ha ha ha ha. 😂 Re: “it’s not time in the market, but market timing…” I see what you did there… it’s of course the reverse, which I’m sure you know, you just left out the /s/ sarcasm mark.

[@jaysoncordrey4272]

Reality check majority of people dollar cost average into their 401k's every paid period. Its not timing the market its time in the market. So this is completely a pointless discussion.

[@johnbankston72]

It’s very relevant to retirees sitting in all cash, deciding the best way to rejoin the market.

[@kkovler1]

Dollar cost averaging works better if the stock market is in an uptrend!

[@no_more_spamplease5121]

The conclusion of the studies is the opposite. Maybe you should read more.

[@whatsdrugs]

What about doing something in-between? I let my cash build for a morth or two, then I look at my assests, purchase ones I believe in that are down, and consider further diversification (not at the expense of dilution). I also leave it in a 4% account so its accumulating a bit of interest in case I'm not confident in anything at that time. So.. Mini lump sum averaging? 😂 The way I figure is that keeping any dollar in your pocket, when you can get greater interest in a stock, even if you sell it in a couple of months, you're wasting your purchasing power. IF your trade fees are low or virtually non-existent. If your trade fees are higher, its a bad strategy because those fees will eat your gains.