# Lump Sum Calculator: Investing Now vs Later (with Dollar Cost Averaging)

Updated 7/17/2024

If there’s one thing that I have picked up on in my investing journey, and I try to preach to you all, it’s that we really need to challenge the status quo and think differently than the norm!

In this spirit, I created a simple-to-use lump sum calculator to see if dollar cost averaging was more advantageous than lump sum investing.

## Dollar Cost Averaging

First of all – what is dollar cost averaging?

Dollar cost averaging is simply breaking up your investing into many different purchases to “hedge your bets” in a sense. Your goal isn’t necessarily to win or lose; you just want to get invested at an average price and not time the market at all.

Usually, this means buying a set amount of a predetermined stock on a regular basis.

The potential upside to dollar cost averaging is avoiding ever paying way too high of a price. If the share price is up one month, it will always be averaged out by the next low month.

## Lump Sum Investing

On the other hand, lump sum investing is investing all of your money at once.

Picture this like taking a bonus from work and investing the entire amount into a single stock in the stock market.

Often, people use lump sum investing because they only invest when they feel like it or think of it as opposed to planning ahead.

The advertised upside of lump sum investing is giving your money as long to grow as possible. If you hold onto money to invest later in the year, that is weeks or months where some of your money is sitting in cash not growing.

## Example

For instance, let’s pretend that you want to purchase a stock and are willing to invest \$12,000 in total. You can buy it all at once or spread it across any time period that makes you feel more comfortable!

For the purposes of this example, I am going to assume that you want to invest \$1000/month over the course of a year.  Take a look at the chart below to see how this situation might play out:

As you can see, the initial purchase price is \$150, meaning you could’ve bought all \$12K at \$150/share. However, the share price could have continued to drop for the rest of the year, meaning you bought at the high point. If you’re dollar cost averaging, you don’t care. You want to spread your money equally into a position and not try to time the market.

Sure, if you had invested all your money in January, you could have gotten a lower cost. But, if you did this in November, you’d pay a higher cost. The purpose of dollar cost averaging is to “average it out” to hedge your bets. You won’t get the lowest cost, but you also won’t get the highest.

## How I Dollar Cost Average – Kind Of

In theory, this makes a ton of sense, right? I don’t ever really want to time the market, so I’ve always been a huge fan of dollar cost averaging, but the more I thought about it, the more I wondered if it actually made sense to do this.

Every time that I am paid and money goes into my Roth IRA, I will then invest it in the market, typically into one of my current positions.  I always thought that was dollar cost averaging, but is it?

I don’t think it is at all.  I’m just making biweekly lump-sum investments.  Sure, I will spread out my investing over the course of the year, but that’s only because that’s when the money is available to me.  If someone gave me \$6K right off the bat at the beginning of the year, I would likely put it all then, right?

Dollar cost averaging is intentionally saving funds with the intent to invest them later solely to spread out your risk.  I’ve always preached that this is the way to go, but ever since the coronavirus impact was felt, I’ve really questioned if this was the right strategy.

When the coronavirus impact hit hard, I took some money out of our emergency fund to “borrow” and invest with it.  I implemented the strategy to max out the Roth IRA as early as possible to take advantage of the market dropping so hard over something that I thought had a short-term impact in the grand scheme of my investing journey.

I made the conscious decision to essentially go against my normal advice and time the market and jump in. Sure, the market could’ve dropped even lower, but I was able to put a lot of money in when it was down 25%, so I felt very confident knowing that I was getting a good deal even if the market went back up.

Since forever, the market has done nothing but go up, so in theory, it makes sense to put as much in the market as early as you can, right? But that was just a theory, and it seemed to really go against all other advice that I had heard from people, so I really wanted to actually put some numbers to it and see how things would shake out.

## A Historical Comparison

So, I looked back at the historical data of the S&P 500 and ran two comparisons.

The first scenario is if I spread out my investments equally over 2 weeks for every week during the year.  Note that this is not because this is how I was paid, but this would be if I had \$260 in total on January 1st and decided only to invest \$10 each week and hold onto the remainder until two weeks later, where I would invest another \$10, rinse and repeat.

The second scenario would be if I invested all \$260 at the beginning of the year and then didn’t touch it.  Then, when the next year came, I would do the same thing.

I compared these two strategies and examined various returns in increments of 1, 5, and 10 years. How do you think it turned out?

Honestly, I was shocked at the results. I thought that a lump sum would win because if the stock market has returned 11% on average per year, then you’d be theoretically better off taking the lump sum more often than not and just making sure your money got in the market sooner rather than later, but that was just my thought process.

You can see in the chart below that I broke the results down into four different periods, which all ended at the end of 2019 and have starting dates as 1929 (the earliest I could get data): 1950, 1975, and 2000.  Then, I took the average, median, max, and min in timespans of 1 year, 5 years, and 10 years.  I also color-coded it so you know that if it’s green, it’s better than the other side, and red means it’s worse.

Take a look!

The very first thing that stood out to me was that there was a TON of green under the lump sum section.  For the most part, I am a long-term investor, so the ‘average’ is what I care the most about.  The ‘average’ for a lump sum is better for every single timeframe and in every single yearly increment.  That is absurd!

I figured it would be closer at some points, but it’s not even close at all. I mean, the 10-year time period is more than double every single Dollar Cost Average time period with the exception of 2000, and that’s really not even a good comparison because there have only been 11 time periods in that range since starting in 2011; you don’t have ten full years of data.

But even if you’re a short-term investor, you’re still way better off getting your money in the market sooner rather than later.  I assumed that you would likely see higher highs, or a ‘max’ and a lower low, or a ‘min’, but that did turn out to be fairly true, but honestly, I couldn’t care less!

I am a long-term investor (for the most part, as I do have some short-term play money), so who cares what a great or an awful year looks like? I want to see what things look like over a long period, so I focus on the average and the median.

I love the saying that “time in the market beats timing the market,” and I agree even more with this.  I used to say this from an opinion, “Don’t worry about timing the market – just dollar cost average your way in, and don’t worry about the highs and lows.”

## What This Means

Now I am changing my mindset and saying, “put all of your investing money into the market right now!”

I do want to caveat that you still need to make sure that you’re being diversified and that you are picking great companies that are set up to be successful for many years to come, so don’t just dump your money in just to dump it in. But if you find a great company and want to put in \$6000, don’t plan to invest \$500/month over the year—just put all \$6K in now if you have it!

If you don’t have that much money, that’s fine.  When you get it, invest it.  I am not telling you that you need to put all of your cash into the market right now or that you need to do something drastic.  What I am telling you is that holding onto cash, even if you have a plan to invest that cash in the future, is a losing strategy…just look at the math I showed you!

Don’t think you need to invest all your money at the beginning of the year or do something drastic now.  I am still going to invest every two weeks when I get paid, but if I plan to put in \$100, I am going to put all \$100 in!  And, if I get a \$1,000 bonus at work, I’m going to invest all \$1,000 at once.

Sure, this strategy might not have been a great one in the past, but now that so many brokerage firms offer zero commission trading and you can buy fractional shares, why wouldn’t you invest this way?

The point is that I invest 100% of the funds that I have when I get them, but ONLY if I put them into a company that I have great trust in. If I don’t know where I want that money to be, then I should never invest it before doing more research!

## Lump Sum Calculator

I created a Lump Sum Calculator for you if you want to see the true impact this might have on your investing journey.  Of course, this assumes that the market is going to be perfectly predictable and give you the same return year on year, which we know never happens, but it since I’m using the same logic for both Dollar Cost Averaging and Lump Sum, it will be apples to apples.

All that you need to do is input the two variables that I have noted below:

CAGR (Compound Annual Growth Rate) – this is simply the amount that you expect your money to grow by every year

Annual Contribution – the amount that you anticipate investing every year

Once you input those two variables into the formula, you can see the results between dollar cost averaging and lump sum investing over a 50-year period!

I only included a 10-year period in my screenshot but you can download the calculator for free below and adjust as you need for up to 50 years!

As I mentioned, only so much can be assumed so I just used a middle-of-the-road number for the dollar cost averaging, meaning that if the market goes up a perfect 8% the whole year and you’re equally balanced in your investments, then you’re going to have an average return of 4% because 25% were 0-2%, 25% were 2-4%, 25% at 4-6% and 25% at 6-8%.  Basically, you protected yourself from losses but also hurt yourself from the major upside.

As you can see, the difference between the strategies increases more and more in favor of the lump sum investing style with each passing year.

From now on, I can say with 100% certainty that I am going to be a lump-sum investor only, and I think that the proof is in the pudding.  You need to make sure you know yourself, though, because if you can’t take the risk of buying in for 100% of your position at the high point and then losing a lot, you need to probably stick with dollar cost averaging.

You see, the thing with personal finance is that it’s all personal.  All of these tips and tricks are just strategies.  These strategies might work with perfect math but we are not robots.  Sometimes we will let our emotions get in the way when we’re looking at our portfolio and determining if we need to sell a stock.

Of course, the goal is always to stick to our checklist and never to get wrapped up into a big change in share price, but that is going to happen.  And honestly, it’s why I recommend that you check your portfolio daily, which is probably the hottest take since this one that Dollar Cost Averaging is for the weak!

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