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Taking Stock of Lump-Sum Investing vs. Dollar-Cost Averaging

Some investors favor a dollar-cost averaging (DCA) approach to deploying their investment capital. Unlike lump-sum investing, in which the full amount of available capital is invested up front, DCA spreads out investment contributions using installments over time. The appeal of DCA is the perception that it helps investors “diversify” the cost of entry into the market, buying shares at prices that fall somewhere between the highs and lows of a fluctuating market. So what are the implications of DCA for investors aiming to generate long-term wealth?
ENTRY LEVEL
Let’s take the hypothetical example of an investor with $12,000 in cash earmarked for investment in stocks. Instead of buying $12,000 in stocks today, an investor going the DCA route buys $1,000 worth of stocks each month for the next 12 months. If the market increases in value each month during this period, the DCA investor will pay a higher price on average than if investing all up front. If the market decreases steadily over the next 12months, the opposite will be true.
While investors may focus on the prices paid for these installments, it’s important to remember that, unlike with the lump-sum approach, a meaningful portion of the investor's capital is remaining in cash rather than gaining exposure to the stock market. During the process of capital deployment in this hypothetical example, half of the investable assets on average are forfeiting the higher expected returns of the stock market. For investors with the goal of accumulating wealth, this is potentially a big opportunity cost.


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This article originally appeared on Dimensional.com. PLEASE CLICK HERE TO READ THE ORIGINAL ARTICLE. 

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