Invest The Lump Sum Or Gradually Over Time?

00:00:00
Picture this: you just came into a large sum of money. Could be an inheritance, a business sale, a 401(k) rollover, and now you're paralyzed trying to figure out when to invest it. Do you invest it all today? Do you spread it out over the next 6 months, a year? Do you wait for the markets to drop or the perfect opportunity to cruise on by? In this episode, I'm going to tell you what the research actually tells us, and more importantly, when the math matters and when it doesn't.

00:00:57
Hello and welcome to the Retired-ish Podcast. For you new listeners out there, I am Cameron Valadez, and today I'm going to walk through what the research says about investing a lump sum of money versus what we call Dollar Cost Averaging, or DCA. We're going to talk about when it matters and when it doesn't. Picture this: your mother, let's say, just passed away and left you $750,000, or you sold your business for $3 million, or you're rolling over a $1.2 million 401(k) into an IRA because you just retired. Now you're sitting on this pile of cash trying to decide, do I invest it all today, or do I spread it out and invest it over time?

00:01:42
This is one of the most common questions that I get, and it drives people crazy because the stakes feel so high. Ask most financial advisors, and they will give you the safest answer, which is, well, it depends on your risk tolerance, which actually doesn't help you make any decisions. And by the way, I'm not a fan of directly asking somebody what their risk tolerance is because most people don't even really know what that means, especially if they don't know much, if anything, about investing. Even if they do provide an answer, like saying, well, I'm very conservative. To one person, it means something totally different than it does to another, so it's not very helpful. I'm more in the camp of, hey, let's go through your situation, let's create a well-thought-out plan, and then we'll discuss the potential risks to your unique plan, because at the end of the day, there is no such thing as no risk. Then you can tell me which risks you're comfortable with taking. But anyway, I digress, and we're only 30 seconds into the episode. My apologies.

00:02:48
Why does this decision of investing everything right now versus gradually over time feel impossible? Well, let's say you invest $500,000 in the stock market on a Monday, and by Friday the market's down 8%. You just "lost" $40,000 in 4 days. Technically, it's just a paper loss as of right now, and you technically didn't lose $40,000 in 4 days, but still, you get that sick feeling in your stomach, and that's what drives this entire decision. It's not probabilities, not expected market returns, it's fear of regret. This is why many people, even professionals, default to what's called Dollar Cost Averaging, or DCA.

00:03:41
And I want to take a moment to define what we're actually talking about here because people use this term rather loosely. Dollar Cost Averaging means you take a lump sum of money you already have, let's say $500,000 in this case, and instead of investing it all today, you break it into chunks and invest it over time. So, instead of putting $500,000 to work on Monday, you invest $41,000 per month for the next 12 months, or $83,000 every other month for the next 6 months, or weekly, you name it. You're spreading out when you buy in. And the theory is that this protects you from potential bad timing.

00:04:25
If you invest everything today and the market tanks tomorrow, you feel like an idiot. But if you're spreading it out, you're buying some shares at high prices and some at lower prices, and it all averages out. That's essentially Dollar Cost Averaging. You're averaging the cost of your purchases over time instead of making one big bet on today's price. It's the emotionally safe answer. If markets tank, you can say, hey, good thing we spread it all out, and if markets soar, you can say, at least we got some money working early. However, I think it's important to know what the data actually shows. Then you can make an informed choice about whether the math matters more than the psychology of all of this.

00:05:14
So here's the math problem with Dollar Cost Averaging. And Michael Kitsis wrote something years ago that completely changed how I think about this topic. He essentially showed that the typical examples used to sell the concept of Dollar Cost Averaging are mathematically flawed. The typical Dollar Cost Averaging pitch shows you an example where the market drops during your averaging period, so you get to buy some shares cheaper than the price you would have paid on day one if you invested a lump sum. Yes, that actually works. If you're averaging in and markets happen to fall, you win. But what most people don't realize is that markets don't fall most of the time, and here we're talking about the general stock markets. The stock market goes up about 75% of all 12-month periods.

00:06:15
Most of the time, when you're Dollar Cost Averaging, you're buying at higher and higher prices. You're not getting shares cheaper. You're paying more and more for them while you wait. Dollar Cost Averaging only helps when markets are falling during your specific averaging period, the period of time that you're deploying that money. But again, since markets rise 70 to 75% of the time and you don't have a crystal ball, you're accepting worse probabilistic results most of the time in exchange for some protection, so to speak, during the minority of times when markets fall. So this only makes sense if you're lucky and the markets happen to be falling during your Dollar Cost Averaging period while you're buying. But then again, even in that case, there can still be some regret because if the market continues to fall, of course, it would have been better to just invest the lump sum once they had bottomed or when they were near the bottom. The trick is, of course, you don't get to know when the market will bottom. But in any case, historically speaking, markets have risen far more than they have fallen.

00:07:33
Now let's take a look at what Vanguard found. Vanguard did the definitive research on this. They have decades of market data across the United States, the United Kingdom, and Australia, and what they did is they tested a wide variety of portfolio mixes. They looked at an all-stock portfolio, balanced portfolios, conservative allocations, and thousands of scenarios. And the result? Lump sum investing outperformed Dollar Cost Averaging roughly 67% of the time, or two-thirds of the time. And for a general 60% stock and 40% bond portfolio, lump sum investing averaged 2.3% higher returns than Dollar Cost Averaging over 12 months. On $500,000, that's $11,500 in one year. On a million dollars, that's $23,000.

00:08:27
So why does lump sum win so often? Well, because again, the U.S. stock market has been positive in about 73% of all years since 1928. It's up in roughly 75% of all 12-month periods. When markets are climbing three-quarters of the time, being fully invested from day one is typically going to capture more growth. And when Vanguard tested longer Dollar Cost Averaging periods, time periods like 36 months instead of 12, lump sum won 90% of the time. In essence, they too found that the longer you wait, the worse your odds are when Dollar Cost Averaging.

00:09:14
All that being said, when does Dollar Cost Averaging win, if at all? Well, Dollar Cost Averaging can win in specific scenarios. So, like we mentioned earlier, if you're averaging into a falling market, so let's just say a time period like 2008 or the year 2000 to 2002, maybe in March of 2020 when the market reacted to COVID, you would be buying at progressively cheaper prices if you were buying in slowly during those time periods, which sets you up well for a potential recovery. The problem is you don't know when those declines are coming. It's easy to talk about them now because we have hindsight, right? You're accepting lower expected returns 67% of the time in exchange for protection during the 33% of times when markets fall. And that trade-off might be worth it for you, but it needs to be a conscious choice, not a default one.

00:10:21
Before we move on, I want to address another myth or common misconception because sometimes people think Dollar Cost Averaging is the best or better than lump sum investing because that's what they do in their 401(k) plan at work, and they noticed over time that their 401(k) has done fairly well, or it's done better than someone else's investment that they know. And the reality is that when you're regularly saving into your 401(k) out of your paycheck, you're actually not Dollar Cost Averaging. You are doing lump sum investments. You're just doing it multiple times. You're not taking the allotted amount that goes into your 401(k) and then slowly investing it once it's in there. You're taking the entire amount, the lump sum from your check, and immediately investing it all in the 401(k). So, I just thought I'd point that out since I hear this all the time from diligent savers. It's kind of a weird way to look at things, but it's true.

00:11:27
Now let's tackle the infamous all-time highs myth. I felt the need to kill this right now because, again, it's one of those things I hear constantly. Hey, Cameron, the market's at an all-time high, or it's close to it. Shouldn't we wait for a pullback of some sort before we invest? And my answer is generally no. Ben Carlson, in his blog A Wealth of Common Sense, actually pulled data showing that all-time highs happen about 20 times a year since 1990, on average. They're incredibly normal. He also notes that your forward returns can actually be better when you invest at all-time highs than on all other days, which is kind of wild to think about. So, one year out, three years out, five years out from an all-time high, doesn't matter. Investing at peaks has historically beaten investing on random days.

00:12:26
Now, why is that? Well, it's because these all-time highs, they cluster during bull markets, times when the markets are really good. Those bull markets tend to continue for quite some time. And yes, of course, eventually one of those highs, those market highs, will be the actual top before the next significant drop, but which one will it be? You don't know. Nobody does. And that's just part of investing. Ben also notes that financial gurus, professors, economists, and media moguls alike have been calling for the top of the stock market since 2010. They've been wrong for over a decade.

00:13:13
So let's talk about reality and what actually happens when people decide to wait for a pullback or a market correction in order to begin investing some large dollar amount and emotions get involved. First, you tell yourself, I'll invest when the market drops, say, another 10%. And what happens? The market drops 8%. You think, close, but I'll wait for that full 10%. Then the market ends up recovering, and it hits new all-time highs, and it does so very quickly. Now you need a 15% drop just to get back to where you told yourself you were going to buy. Then it drops 12%. You think, this could be the start of something bigger, especially since there's, you know, an apocalyptic headline XYZ all over the Wall Street Journal and CNBC. So, I'll wait. Besides, there's no rush. This money is “safe” as it sits right now in my bank account. I love looking at it. Then the market recovers again. Meanwhile, two years have passed. You're earning nothing on your cash while markets are up 40% now, and the regret is starting to set in. And inflation, by the way, has eaten away at the purchasing power of your cash for two years and counting. The entry point that would make you comfortable keeps moving higher, and you're psychologically paralyzed.

00:14:43
I had a prospective client go mostly to cash at the end of 2019 because markets felt too high to him. In early 2020, when COVID took the world by storm, the market cratered, and it did so very quickly, and he felt like a genius at the time, of course. But guess what? Since then, the S&P 500, including dividends, is up around 138% as of the recording of this episode. And he never got back in, not even after the significant market drop from COVID, because, hey, who would have had the confidence to invest their money while the market is cratering, right?

00:15:24
He's not even totally in today, but he's also not invested like he used to be because every correction convinces him that the real crash is coming next, the bigger crash, the more prolonged crash. Shortly after COVID, just two years later, he saw stocks and bonds drop significantly while the Fed went on an interest rate hiking campaign and inflation was at an all-time high, and this only spooked him back to cash on the sidelines.

00:15:55
Now, a situation like this is not a strategy. That's paralysis. And that paralysis can be detrimental to your financial goals, and especially your retirement income.

Now, the next part of this whole conundrum that I want to discuss is the other issue, which is that being right twice is nearly impossible. But when you decide to wait to invest a lump sum of money or start Dollar Cost Averaging, you need to be right twice. First, about when to wait or sell, depending on your situation and how you're getting this lump sum of money. Then you need to be right about when to buy. So, for instance, how many people correctly called the 2008 crash and got out of the market just in time? Likely a handful. How many of those people got back in at the bottom in March of 2009 with every dollar they took out initially in 2007, 2008? Almost nobody. They were still traumatized, still convinced things would get worse, and still waiting. They missed the entire recovery.

Going all in or out feels decisive in the moment, but it requires perfect timing on both ends, and perfect timing doesn't exist when it comes to investing. So, Murphy's Law also applies here. Every investor with a lump sum has the same thought. If I invest today, the market will crash tomorrow. That equates to human beings in general simply being risk-averse. We think about the pain that can be caused, and that pain is worse than giving up any sort of potential upside opportunity. And this feeling is worse when markets have been strong. You know, people say things like, "Oh, we're due for a pullback or a correction," or "Stock valuations are too high," and
“There's too much uncertainty in the world right now. You know, everything's about to crater and fall off a cliff.”

00:18:00
There's always uncertainty, and there always will be. In 2016, it was the election. In 2018, it was trade wars. 2020, COVID. 2022, inflation. Today, it's oil shocks and Middle East conflicts. If you wait for certainty, you'll never invest. Being down 20 to 30% from the highs, which is where some parts of the market actually are right now, isn't the time to get scared. That's actually when the math tilts towards just investing. The time to fear lump sum investing is at the actual peak in markets, but you don't know when that is until after the fact.

00:18:44
So you might be wondering, how do we deal with this? What do you do with real people, with real clients, when there's emotions involved and math and a lot of money on the line? Well, the first question, and this is just me personally, that I like to ask is, is this money that was already invested? Rolling over a 401(k) that was 60% in stocks, moving money between brokerages, maybe you sold a property that had appreciated, that money was already at risk somehow, some way. So you're not being really aggressive by investing it, you're just being consistent. We would have a strong presumption towards lump sum investing in cases like these.

00:19:32
A second question I typically will ask is, how much is this relative to your total wealth? $300,000, when you have $5 million, that's 6%. So any volatility that you might have if you were to invest the lump sum right away should be pretty manageable. So lump sum in this case, again for us, makes sense.

00:19:55
Now, what about a combination of the first and second questions? What about investing $600,000 when you have just inherited $1 million total, and you are brand new to investing? Well, that $600,000 is 60% of everything. One bad week and you're staring at a six-figure paper loss, potentially, that's also giving you severe anxiety. That's psychologically different, even though the math still says to invest the lump sum. I'd rather you do whatever helps you stick to your investment plan rather than base it off the numbers only, just to have you give up on the investment plan, blow it up, and hurt yourself permanently. So in that case, we probably lean more towards some sort of dollar cost averaging.

00:20:46
The third question I will typically ask is, what is your time horizon for this money specifically? And what's the goal that you have attached to it or earmarked? If you're 45 and this is retirement money that needs to last you from retirement at age 65 to age 95, well, you still have 20 years to continue accumulating. So, potential lump sum market timing mistakes will likely get smoothed out over two decades. If you're 68 and you need this money for living expenses soon, that's a different calculation. Sequence of returns risk is very real when you start to draw income.

00:21:28
In these cases, the question may not be lump sum or dollar cost average necessarily, but it might be, how do I properly allocate this money across different asset classes? For instance, you may not be able to emotionally handle a lump sum investment of a large sum of money in the stock market, but if your plan calls for around an 80% stock allocation and a 20% bond and cash allocation, which, by the way, aren't nearly as volatile as stocks, would you be opposed to lump sum investing the bond and cash allocation? Likely not.

00:22:10
The fourth question we like to ask is, what will you regret more? This is the real question, not what the Vanguard study says. This is what keeps you up at night. Some people would rather miss 2 to 3% of returns than risk a 15% loss right after investing. Now, that's not irrational, that's just standard human nature. Other people would kick themselves forever if they sat in cash while markets rallied 20%. You know, I had the money, I knew what to do, and I chickened out while other people were making money, and now I regret it. Which one are you? Because that answer matters more than any sort of research paper or math problem.

00:22:55
So for clients who are torn between math and emotion, I usually recommend some sort of hybrid approach. As one example, you could invest, say, 50% of the total amount immediately. You're in the game, you're capturing most of that advantage from lump sum investing. Then you could invest, let's say, 30% over the next three to six months in equal chunks. Just pick a schedule, monthly, biweekly, whatever. You want to automate it to keep you honest. Then you could keep 20% in short-term bonds or some other cash alternatives as your cushion. And that gives you some dry powder if markets crash, and if they don't crash after, let's say, six to twelve months, then you just invest the rest of it, no questions asked.

00:23:46
Again, this is just a hypothetical example. Your game plan will always be unique to you and your goals and the answers to those four questions. Now, is this mathematically optimal? No, but it's behaviorally optimal for people who need to sleep at night. As I mentioned earlier, a plan you'll stick with beats a perfect plan that you'll abandon. Whatever you decide, lump sum, dollar cost averaging, some kind of hybrid method, write it down. And not in your head, actually write it or type it out, date it, sign it, whatever you got to do, put it on your fridge.

00:24:24
On March 18th, 2026, I invested 500,000 as a lump sum because XYZ reasons. Markets could fall tomorrow, I might regret this, but I'm making this decision for a 20-year time horizon based on historical probabilities. I will not second-guess this for at least 12 months, whatever, sign. Or, on March 18th, 2026, I'm investing $50,000 per month for 10 months because I need the emotional comfort of spreading this out. I will not deviate from this schedule regardless of what markets do. Whatever you want to put.

00:25:00
Why does this matter? In three months, when markets have moved 15%, let's say, in either direction, you're going to second-guess yourself. That written document reminds you why you made the decision when you weren't reacting to performance that just happened recently, that might be fairly meaningless. The worst investment decisions aren't always the wrong strategies. They're usually just abandoned strategies because something triggered a powerful enough emotion to cause a reaction. Lastly, what about what's going on right now? You know, it's March 2026, there's constant flux in the news, it just seems like more chaos than ever, right? And I know a lot of you are thinking about the current environment. Oil prices, as of this recording, they've basically doubled. There's a war in the Middle East. Markets are volatile. If you're holding a lump sum right now, markets are already down from highs in many different areas. Some small-cap stocks are down 25 to 30%. A lot of big tech stocks are down 40% in some cases. We've had multiple corrections that have actually happened in different areas of the stock market, even though the overall stock market isn't down too much currently. So if you've been waiting for some sort of pullback, you got several. And if you're still waiting, you're not waiting for a correction. You're waiting for certainty that likely will not come. March of 2020, when COVID hit, and markets crashed 35%, people who invested then are up over 100%.

00:26:49
In 2022, when markets dropped 25%, those investors are up significantly now as well. So fear feels like prudence in the moment, but it rarely is when it comes to investing.

Here's the bottom line. The math says lump sum wins about 67% of the time, with 2 to 3% higher returns on average. The longer you wait, the worse your odds get. But math isn't everything. If lump sum investing will cause you to panic sell during the next market correction, you're better off just dollar cost averaging.

00:27:26
Now here's my kind of hierarchy, if you will. Comfortable with volatility, small percentage of your net worth, long time horizon, lump sum is probably the way to go. If you're nervous but rational, some hybrid method that fits your goals, that'll get most of it working, and you can just ease in with the rest and keep a cushion. If you're genuinely terrified, then dollar cost average over 6 to 12 months, for example. Not two years, not until it feels right, 12 months. Except that you're trading potential returns for some peace of mind, but don't get too carried away with it. Money already invested elsewhere.

00:28:10
Strong presumption towards a lump sum as well. You're not being aggressive. Again, you're just redeploying that money. You're being consistent. The worst choice is sitting in cash, indefinitely waiting for the perfect moment. That's not a strategy. That's procrastination and market timing, which doesn't work. Make a decision, write it down, follow it, and disciplined execution beats perfect strategy every time.

As always, if this episode was helpful, please follow the podcast and share it with someone who you think may benefit. Be sure to check out and subscribe to the Retire-ish newsletter to get more useful information on retirement planning, investments, and taxes once a month straight to your inbox. The newsletter often dives deeper into some of the topics we discuss on the show, as well as useful guides and charts available for download. If you want to start implementing planning like this into your own life, you can find links to the resources we have provided in the show notes right there on your podcast app, or you can head over to retireishpodcast.com/90. Once again, I'm Cameron Valadez, Certified Financial Planner and Enrolled Agent. Thank you for tuning in and following along. See you next time on Retired-ish.

00:29:50 Disclosures
Cameron Valadez is a registered representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. The data provided is believed to be accurate, but there is no guarantee of its accuracy, completeness, or timeliness. This is not a recommendation or offer of any financial product. All performance referenced is historical and is no guarantee of future results. All investing involves risk, including loss of principal. No strategy assures success or protects against loss. The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features, and credit risk. Asset allocation does not ensure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Tax and accounting-related services offered through Plan-It Business Services DBA Planable Wealth. Plan-It Business Services is a separate legal entity and not affiliated with LPL Financial. LPL Financial does not offer tax advice or tax and accounting-related services. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.