This article offers a clear comparison between two fundamental investment strategies: dollar-cost averaging and lump-sum investing. Here we will provide investors with practical insights to help them choose the approach that best aligns with their financial goals and risk tolerance.
With dollar cost averaging, a fixed dollar amount is invested incrementally on a regularly recurring basis, typically monthly.
The underlying idea is that spreading the purchase of publicly traded securities including stocks and exchange-traded funds over a protracted period can allow the investor to skirt share price fluctuations.
A major part of the strategy’s appeal is that it eases the psychological strain that is common when attempting to time what are inherently volatile markets. The approach is particularly suitable for novices with little to no market experience and those with regular income streams for which investments can be made.
Generally, DCA is used more for volatile investments, mutual funds or stocks, instead of for certificates of deposit or bonds.
DCA Pros:
DCA Cons:
In contrast with dollar-cost averaging, lump-sum investing is a strategy in which the total investment capital is employed all at once.
There are scenarios in which lump-sum investing might be more suitable, such as when an investor is receiving a windfall. In that case, it is relatively more common for the investor to put a large portion of their inheritance in the stock market. Whether that is the right move depends upon the economy’s health and other factors.
Lump-sum Investing Pros:
Lump-sum Investing Cons:
A general rule is that with the lump-sum approach, investors may generate somewhat higher annualized returns than dollar-cost averaging, according to a Northwestern Mutual Wealth Management study.
Compared to lump-sum investing, contributing to one’s portfolio via smaller amounts may be a better way to ease into the market, according to FINRA, especially if there is concern about the market’s outlook.
If investors have a relatively low risk intolerance, states WealthyEducation.com, they may become unsettled if they put capital in the market all at once and prices fall.
An investor made the initial of a number of investments just prior to a sharp drop in share prices and incurred an unrealized loss solely on the portion invested to date – not the whole amount they intended to invest. That dollar-cost averaging strategy could work even if the initial returns are unfavorable.
If another investor has $24,000, with the lump-sum strategy, all the capital is invested in the first month. With DCA, though, $2,000 is invested in the first month and the remaining $22,000 is held in cash to be invested in payments of $2,000 over the next 11 months.
Here are some tips on deciding between DCA and lump sum, factoring in personal financial situations and risk, market conditions, market trends, and investment goals.
No matter what strategy an investor uses, diversification is key. The practice of spreading one’s investments among varying asset classes, with different risks and anticipated returns, is necessary for long-term investing success.
For example, diversification is a chief reason why investors are increasingly turning to private investments such as art, real estate, and other asset classes offered by the leading platform Yieldstreet to establish a portfolio mix that not only can mitigate overall risk and protect against inflation, but possibly offer improved returns.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.
Learn more about the ways Yieldstreet can help diversify and grow portfolios.
Before choosing a strategy, investors should evaluate their financial goals and risk tolerance to make sure they are picking the best approach for their situation. They should also apply what they have learned to their investment journey, which also should emphasize diversification to mitigate risk.
What's Yieldstreet?
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.