DCA vs lump sum: which is best?

What is lump sum investing?

Lump sum investing is an investment strategy where you invest all your available capital at once, rather than spreading it out over time. You invest the entire amount in a single transaction instead of making regular contributions. This happens no matter what the market is doing. This approach keeps you invested longer. It helps your money grow over time through compounding and benefits from long-term growth.

What is DCA (dollar-cost averaging)?

With dollar-cost averaging (DCA), or euro-cost averaging in Europe, you invest small amounts regularly instead of putting in a big sum at once. You invest at set times, like every month, no matter how the markets are doing.

Mathematically, lump sum investing earns better returns

Mathematically, investing everything at once results in a better return in most cases. That's because the markets tend to go up on average. So the earlier you get in, the more your investments can compound. A key word is "in most cases" though. There are cases where it would have been better to wait, for instance, right before a big downturn. But those situations are rare. Statistically, the markets are much more likely to rise soon after you invest.

Vanguard’s research compared lump sum investing vs DCA across different markets and time periods. Their research shows that lump sum investing wins about two-thirds of the time. This happens because markets usually go up over the long run. If you want to maximise returns, it's usually better to invest everything at once.

But we're not robots

We are not cold, mathematical beings though. Our psychology plays a big role in our decisions. When you're just starting, it can be scary to invest a large sum in one go! Just for this reason, it may help you to spread it out over several months. There is nothing wrong with that.

In the end, the best strategy is the one that keeps you invested and confident in the long run.

When you should DCA

Here are some key reasons why dollar-cost averaging works well for many investors:

• You're likely paid monthly
• You don't miss out on that many returns when you DCA
• No temptation to time the market
• Helps you build discipline
• Avoids regret
• Best suited for long-term investing

You're likely paid monthly

Your finances then progress at a monthly rhythm. Investing at the same frequency simplifies saving and budgeting.

You don't miss out on returns when you DCA

The best time to invest was yesterday, the second best time is today.

The financial markets go up and down. But the long-term trend is upward. The longer you wait to invest, the more likely you are to miss out on returns. By investing part of your salary as soon as you receive it, you force yourself to invest as early as possible.

No temptation to time the market

Timing the market is incredibly difficult. The global economy is very complex. Many factors affect the financial markets, and most are beyond our control. For instance, no one could predict the exact timing of the Covid pandemic. When timing the markets, the odds are against you. You may get lucky, but in most cases you'll be worse off.

Investing every month, no matter how the market performs, helps avoid the urge to time it.

Avoids regret

Trying to time the markets can be exciting, but it's also stressful. You might not know if it’s the right time to buy or sell. So, you may end up making a wrong choice sometimes. Don't regret your decisions. Dollar-cost averaging reduces stress and regret, giving you peace of mind.

Best suited for long-term investing

Consistent monthly investments are the best way to save for the long term. As your career progresses, you will likely increase your monthly income. With DCA, you can easily adjust your monthly contributions to fit your financial situation.

When you should lump sum

Lump sum investing can often be the best way to maximise your returns for several reasons:

• Historically higher returns
• More time in the market
• Simplicity: invest once and forget
• You're confident with investing
• Reduces the risk of holding too much cash
• You’re investing in a long-term strategy (for instance index funds or ETFs)

Historically higher returns

Markets usually go up over time. This means that investing everything at the start lets your money grow for the longest time. Research, including studies from Vanguard, shows that lump sum investing beats dollar-cost averaging about two-thirds of the time.

More time in the market

The saying goes, “Time in the market beats timing the market.” By investing immediately, you let compound growth do its work. The earlier your money is invested, the longer it can accumulate returns.

Simplicity: invest once and forget

Lump sum investing means you don't have to make many investment decisions later. There’s no need to track monthly contributions as you invest once and let your portfolio do the work.

You're confident with investing

Lump sum can be scary if you're new to investing. But if you're more experienced, and ideally you've gone through a market downturn, you may be psychologically ready to invest a large sum without staying up at night.

Reduces the risk of holding too much cash

If you wait and invest slowly, some of your money stays in cash. This means you miss chances for market growth. Lump sum investing gets your capital working for you immediately, so it doesn't sit idle.

Avoids unnecessary decision-making

Investing over time requires a monthly choice. You need to decide whether to continue, make changes, or stop. This creates room for hesitation, second-guessing, and emotional decision-making. A lump sum investment removes this friction entirely.

You're investing in a long-term strategy

If your investment horizon is measured in decades, short-term market movements matter less. What truly counts is getting your money in as early as possible. Lump sum investing allows you to maximize long-term returns without worrying about short-term fluctuations.

I don't have a lump sum, should I wait to invest?

No. Most of us are paid monthly, so it makes a lot of sense to invest on a monthly basis. Automating your monthly contributions is even better. It helps you build good saving habits.

When it comes to savings habits, we cannot come up with better words than Warren Buffett:

Don't save what is left after spending; spend what is left after saving.

Disadvantages of lump sum investing

Psychological impact of market downturns (fear of investing at the wrong time)

One of the biggest challenges with lump sum investing is the fear of bad timing. Investing a lot right before a market downturn can cause your portfolio to drop quickly. This can be psychologically difficult to handle. This fear can make you hesitate or doubt your choices. As a result, you might delay investments or sell in a panic, leading to losses. The emotional impact can be strong, especially for new investors.

Higher short-term volatility

Investing a lump sum means your whole investment is quickly affected by market changes. When the market is volatile, your portfolio might see big changes in value. This can be unsettling. Lump sum investing, unlike DCA, does not spread out investments. It offers no protection against short-term downturns. Markets usually rise over time, but short-term changes can be sharp. This requires patience and the strength to stay invested, even when prices go up and down.

Our conclusion

Whether you choose lump sum investing or DCA depends on your personal situation and comfort level. If you have a large sum ready to invest and can handle short-term market swings, lump sum investing historically gives better returns. But if you're paid monthly or prefer a more gradual approach, DCA helps you build a consistent investing habit while managing your emotions.

The most important thing is to start investing, regardless of which method you choose. The longer you wait, the more potential returns you miss out on. And remember, you can always adjust your strategy as your financial situation changes.

Ready to start your investment journey? With Curvo, you can easily set up both lump sum investments and monthly contributions in a portfolio that matches your goals.