About this Video

• Video Title: Should You Invest All At Once or Little By Little?
• Channel: Personal Finance with Leila - Debt Over It
• Speakers: Laya
• Duration: 00:16:01

Introduction

This video compares two investment strategies: dollar-cost averaging (DCA) and lump-sum investing (LSI). Laya defines each strategy, provides examples, discusses the pros and cons of each, and cites research indicating that LSI generally yields higher returns over time. However, she emphasizes that the best strategy depends on individual circumstances and comfort levels.

Key Takeaways

• Dollar-Cost Averaging (DCA): Investing a fixed or variable amount regularly, regardless of market price. Pros: reduces emotional investing, lowers risk of bad timing, and is psychologically easier, especially for beginners. Cons: potentially lower returns over time and delays market exposure.
• Lump-Sum Investing (LSI): Investing a large sum of money at once. Pros: tends to have higher returns over time and provides immediate market exposure. Cons: risks poor timing and can be emotionally harder to commit to.
• Research Findings: Studies from Vanguard and Northwestern Mutual show LSI outperforms DCA in most cases, particularly over longer time horizons. Vanguard's study showed LSI outperformed DCA 68% of the time across global markets after one year. Northwestern Mutual's study, using a $1 million investment, showed LSI generated better returns than DCA almost 75% of the time over 10 years.
• Choosing a Strategy: The best strategy depends on individual financial situations, risk tolerance, and time horizon. DCA is suitable for beginners, those with limited funds, and during uncertain market conditions. LSI is better suited for those with a large sum to invest, a long time horizon, and a higher risk tolerance.
• Importance of Investing: Regardless of the chosen method, consistent investing is crucial for long-term financial success.

Laya uses two examples to illustrate dollar-cost averaging:

1. Roth IRA contributions: She explains that to contribute the maximum $7,000 to a Roth IRA in 2025, one would need to contribute approximately $583 per month. This consistent monthly contribution exemplifies DCA.

2. 401(k) contributions: She describes how many people contribute a percentage of their paycheck to their 401(k), which is another form of DCA, even if the amount increases with raises or bonuses. She also notes that contributing a variable amount, such as $50 one month and $100 the next, still falls under the umbrella of DCA.

The Vanguard study, using data from Finlay and Zorn, found that lump-sum investing outperformed dollar-cost averaging 68% of the time across global markets when measured after one year. They compared $100,000 investments across various portfolio allocations (60% stock/40% bonds, 40% stock/60% bonds, and 100% stocks).

The Northwestern Mutual study used a larger scale, comparing a $1 million lump-sum investment with dollar-cost averaging. Their data showed that the lump-sum investment generated better cumulative total returns at the end of 10 years almost 75% of the time, regardless of asset allocation. Both studies, therefore, support the idea that lump-sum investing tends to yield superior returns over time.

Laya identifies two main cons of dollar-cost averaging:

1. Potentially lower returns over time: While not a significant difference compared to lump-sum investing, DCA may result in lower overall returns.

2. Delayed market exposure: Because money is invested gradually, there's less capital in the market to benefit from potential growth and compounding returns compared to immediately investing a lump sum.

Laya suggests lump-sum investing makes sense in the following situations:

• Large sum of money available: You have a significant amount of money you're willing to invest.
• High risk tolerance: You are comfortable with the potential for volatility and short-term losses in the market, understanding that long-term market trends are generally upward.
• Long time horizon: You plan to invest for an extended period (10, 15, 20, or 30 years), allowing time for market fluctuations to even out and for your investment to grow.

She also specifically mentions that if you have received a windfall such as an inheritance or settlement, lump-sum investing could be considered.