Dollar-Cost Averaging: Should You Drip-Feed a Lump Sum or Invest It at Once?

If you are investing money as you earn it, regular contributions are the sensible default, and if you contribute to a KiwiSaver Scheme from your pay you are already doing it. If the full amount is already available, the evidence favours investing it immediately: historically, investing a lump sum at once has beaten drip-feeding it in roughly two-thirds of one-year periods.

In practice the decision comes down to three cases. Invest immediately if the money is for the long term, the portfolio suits you, and an early fall would not change your plan. Stage it over about three months, on fixed dates, if investing at once would otherwise lead to paralysis or panic-selling. And if the intended portfolio itself feels intolerable, change the mix of investments rather than the entry schedule.

Dollar-cost averaging (DCA) is the name for the staged approach: investing a fixed sum at regular intervals, regardless of what markets are doing. Benjamin Graham described it in The Intelligent Investor in 1949. Invest the same number of dollars each month or quarter, and you will buy more units when the market is low than when it is high, so the price you pay smooths towards an average. For most people it is what happens when money is invested as it is earned. It becomes a decision, and a contested one, when a lump sum arrives.

Regular contributions average themselves

KiwiSaver contributions are deducted from each pay, and an automatic payment into a managed fund or index fund works the same way. Each instalment is invested as soon as it exists, so no cash is held back waiting for a better moment. Nick Maggiulli, chief data officer at Ritholtz Wealth Management and author of Just Keep Buying, whose analysis appears below, treats these contributions as a series of small lump sums rather than DCA at all. Whatever the label, the behavioural advantage is the same: the timing decision is made for you each pay cycle. For people building wealth during their working years, this is where DCA delivers most of its value, building a meaningful portfolio from amounts a household can absorb without strain.

A lump sum is where DCA becomes a decision

The choice arises when a significant sum arrives, perhaps from an inheritance, the sale of a property, the sale of a business, or a large bonus. Do you invest it all now, or drip-feed it into the market over several months while the rest waits in cash?

Before that question, set aside any part of the sum needed for near-term spending, for repaying expensive debt, or for an emergency reserve, and decide the mix of investments you could hold through a bad year. Only the amount left over, invested in a mix you can live with, is the lump sum this article is about. A KiwiSaver account is rarely the right home for it, because the money is generally locked until 65 or a first-home withdrawal. Staging the entry cannot fix an unsuitable portfolio, and a nervous investor who drip-feeds into an all-share fund they could never hold through a downturn has solved the wrong problem.

To see what is at stake, imagine you have $12,000 and decide to drip-feed $2,000 per month over six months into a diversified managed fund. Managed funds are divided into units, and the unit price is the value of the fund's assets, less liabilities, divided by the number of units on issue. A fixed $2,000 therefore buys more units when the price is low and fewer when it is high.

• Falling then recovering market. The unit price starts at $1.20, drops to $1.00 and $0.95 in months two and three, then recovers to $1.10, $1.15 and $1.25. Your six instalments buy 10,929 units at an average cost of $1.098, worth $13,661 at the final price. An investor who put the full $12,000 in on day one at $1.20 holds 10,000 units worth $12,500. Drip-feeding won here because prices during the deployment period were lower than the starting price.
• Steadily rising market. The unit price climbs from $1.00 to $1.50 in 10-cent steps. Your six instalments buy 9,785 units, worth $14,678 at the end. The day-one investor holds 12,000 units worth $18,000. Drip-feeding lost because each later instalment bought fewer units at a higher price.

Drip-feeding therefore has no built-in advantage from buying more units when prices are low. It comes out ahead only when prices during the drip-feed sit below the starting price, and behind whenever they sit above it.

What the evidence says about lump-sum investing

Vanguard's 2023 paper, Cost averaging: invest now or temporarily hold your cash?, compared investing a lump sum on day one against splitting it into three equal parts invested a month apart, with the two investors' positions compared a year later. The global test used the MSCI World index over every rolling one-year period from 1976 to 2022, and separate regional tests used each country's own share index over the years for which data was available.

Investing the lump sum immediately produced the higher result about 68 percent of the time in the global test. Against the same three-part schedule, the regional results were similar: 66.4 percent of periods in the United States, 68.1 percent in the United Kingdom and 67.5 percent in Australia. New Zealand was not tested separately. Australia is the nearest regional comparison, and the global result may better reflect the diversified international exposure most New Zealand fund investors hold. The median advantage for an all-share portfolio was about 2.2 percent of the starting sum after one year. For a balanced portfolio of 60 percent shares and 40 percent bonds it was about 1.8 percent, and for a more conservative 40/60 mix about 1.2 percent.

Markets rise more often than they fall. Across Vanguard's sample, shares beat cash in 76 percent of one-year periods and bonds did so in 68 percent, so money waiting in cash is more likely to be missing gains than avoiding losses. Each month of delay forgoes a slice of the equity risk premium, the extra return investors expect for accepting the volatility of shares rather than the relative safety of cash.

Stretching the drip-feed widens the gap. When Vanguard lengthened the split to six months, the lump-sum win rate rose to 73.7 percent in the United States and 72.5 percent in Australia. Other research points the same way, using different methods. Maggiulli, writing at Of Dollars and Data, tested a 24-month drip-feed into the S&P 500 from 1997 onwards. It trailed the lump sum in roughly 80 percent of starting months, by about 10 percent on average at the end of the window. The only periods where the long drip-feed came out ahead were the market crashes themselves.

For a lump sum, then, DCA is on the balance of probabilities the lower-returning approach, and the longer you stretch it the more that is true. Anyone choosing it is accepting a lower expected return in exchange for something else.

The part of the evidence DCA's critics tend to leave out

The same Vanguard paper contains the best case for cost averaging. The win rates and medians above describe the typical year, while most investors worry about the bad ones. When Vanguard looked at the worst 5 percent of one-year outcomes, cost averaging was ahead in every portfolio mix tested. At the fifth percentile of Vanguard's rolling one-year results, an all-share portfolio starting with $100,000 finished at $82,947 under immediate investment against $85,906 under cost averaging. For a 60/40 portfolio the figures were $92,720 and $94,043. Lump-sum investing has a higher median and a wider spread, so it does better in most years and worse in the worst ones.

Vanguard then modelled investors with different attitudes to loss, using a loss-aversion setting in which a dollar lost hurts about two and a half times as much as a dollar gained pleases. For an adventurous investor, the lump sum still won. The very conservative investor preferred cost averaging even before loss aversion was considered. Once it was, the moderately conservative investor joined them, because the reduction in bad-year pain outweighed the modest reduction in expected return.

Morningstar's modelling of the dot-com bust, from March 2000 to October 2002, shows the size of that reduction in a severe case. An investor drip-feeding into an all-share portfolio limited the loss to 1.75 percent, while the lump-sum investor lost 13.84 percent a year over the same period.

In Vanguard's historical all-share test, then, the median ending value was about 2.2 percent higher under immediate investment, while at the fifth percentile the staged investor finished about 3 percent better. Cost averaging reduces how much is exposed during the first few months; once the full sum is invested it offers no floor. Whether the lower early exposure is worth the lower expected return depends on your temperament. The paper's own conclusion is that most investors, particularly those without strong loss aversion, should invest a lump sum straight away. Investors who would otherwise freeze and hold cash indefinitely are better served by a short cost-averaging plan than by no plan at all.

Why people choose the lower-returning option

Behavioural research has repeatedly found people feel losses more intensely than equivalent gains. Kahneman and Tversky's work on loss aversion established that people commonly weigh losses more heavily than equivalent gains, and Vanguard's model assumed a loss weighs two and a half times a gain. Investing $300,000 and watching it drop 15 percent in the first month is financially survivable, though for many people it can be psychologically awful. In that instance, the urge to sell to avoid the possibility of more losses is powerful, and DCA softens the experience by limiting how much capital is exposed to a single bad stretch.

New Zealand saw this during the COVID-19 market fall. In the year to 31 March 2020, the Financial Markets Authority recorded 256,393 switches between KiwiSaver funds, up 54 percent on the previous year. Some $1.5 billion moved out of growth and balanced funds into conservative and cash funds. Providers reported the surge concentrated in the last weeks of March, as the country entered lockdown. The regulator's concern was members locking in losses by trying to time the market, although it noted a more conservative fund may have been the right call for some members close to 65 or about to buy a first home. Anyone else who moved to cash near the bottom then faced a second decision, when to move back, while markets recovered faster than most expected, leaving losses locked in.

Regret can function in the same way. An investor who deploys a lump sum the week before a correction might feel it acutely, even if the long-term outcome remains favourable. An investor partway through a DCA plan feels they did something useful by buying later tranches at lower prices. The emotional difference is large even where the financial difference is small.

If deploying a lump sum immediately would keep you awake at night, DCA is a legitimate tool for keeping you invested.

"There is always a reason not to invest: wars, disasters, the economy, potential pandemics, politics, and more. That is probably why in our experience, the larger risk with a lump sum is procrastination rather than the market. Clients who plan to drip-feed $300,000 over 12 months sometimes still have $200,000 sitting in a savings account two years later, because no single month ever felt like the right one. If DCA helps someone move from inaction to invested, the small mathematical cost is worth it," says Vinessa Orsbourn, financial adviser at Become Wealth.

How long to spread a lump sum, and where the cash waits

If you do choose to drip-feed, keep it short. Three months is the period Vanguard used as its base case, and its own figures show the lump-sum advantage widening at six and Maggiulli's show it widening further at 24. Most of the reduction in early exposure comes from the first few instalments, and the later ones mostly add delay. Where staging is necessary, our usual practice is to keep the schedule to about three months, a behavioural compromise rather than an optimal period. Beyond six months, we would normally test whether the schedule is still managing behaviour or has become a way to postpone the decision.

Maggiulli offers a different answer to the same worry. If a lump sum into shares feels too exposed, invest the whole sum immediately into a more conservative mix, such as 60 percent shares and 40 percent bonds. In his data from 1997 to 2022, a lump sum into a 60/40 portfolio beat drip-feeding into an all-share portfolio in most periods, at a similar level of risk. The nervous investor gets the lower volatility they wanted without leaving money in cash at all. The distinction has long-term consequences. Drip-feeding changes only how quickly you reach your target portfolio, while a more conservative mix changes the portfolio itself, so it suits only an investor for whom that mix remains right after the first few months have passed. Adopting 60/40 for six months and then switching to all shares simply moves the timing decision.

Set the dates in advance and automate the transfers, as this removes any potential opportunities to lose your nerve.

The waiting money should sit somewhere liquid, such as an on-call savings account or a cash fund. An ordinary term deposit may be awkward if its maturity does not match your investment dates. For an investor whose prescribed investor rate is 28 percent, income attributed by a cash fund structured as a PIE is taxed at 28 percent, against a marginal rate of up to 39 percent on bank interest earned directly. Over three to six months the difference is small in dollar terms.

Record highs and expensive markets

The most common reason people give for drip-feeding is that markets look expensive. The instinct is understandable, and the evidence for acting on it is thin. Maggiulli tested whether high valuations, measured by the cyclically adjusted price-to-earnings ratio, changed the result. Valuations did change the result at the extreme: when the ratio was above 30, DCA beat the lump sum by about 5 percent on average. Almost the entire sample at that level came from the dot-com era, however, and a record high on its own is a weak signal, because a market which rises over time sets new highs routinely.

Morningstar Australia's investment specialist Shani Jayamanne makes the sharper point: switching between lump sum and DCA depending on how the market feels is market timing under another name. Investors tend to deploy quickly when they feel optimistic and drip-feed when they feel nervous, which is the reverse of what the pattern of returns rewards. Choosing DCA because prices look high amounts to a market forecast. Choosing it because you know you would panic after a fall is self-knowledge, and the evidence supports acting on the second reason far more than the first.

When DCA does not help

DCA governs how you buy in, and it cannot repair a poor decision about what to buy or when the money will be needed. A few situations where DCA alone will not solve the problem:

• You are in the wrong fund or mix of investments. Regularly investing into a fund or portfolio misaligned with your time horizon or risk tolerance will produce a poor outcome regardless of how disciplined your contributions are. Make sure your KiwiSaver Scheme, portfolio or managed fund suits your retirement plans before refining the entry schedule.
• Your timeframe is too short. DCA smooths entry prices over time, but it cannot eliminate the risk of a falling market over a short period. If you need the money within two or three years, growth assets may not belong in the mix at all.
• You are using DCA as a procrastination tool. Deciding to DCA over 24 months can become a way of delaying the commitment indefinitely. If you keep extending the timeline or pausing contributions when headlines turn negative, you have turned a DCA plan into an open-ended wait.

What to do with a lump sum

Dollar-cost averaging offers no protection against a prolonged bear market, and for lump sums investing immediately has the higher probability of a better outcome. What it does offer is a way past the paralysis of waiting for the perfect moment and the fear of committing a large sum at once.

The evidence supports a simple standard. Decide how much of the sum is available for long-term investment once near-term needs are covered. Choose a mix of investments you could hold through a bad year. Then either invest the whole amount now or, if staging is what it takes for you to act, set a short schedule of fixed dates, automate the transfers, and do not revise them because of the headlines. The costliest common mistake is to leave the money in a savings account or term deposit for years while waiting for the courage to invest at all. Over long periods, cash has generally offered lower after-tax growth than a diversified growth portfolio, although it remains the right place for near-term needs and reserves.

If a windfall, property sale or inheritance has left you weighing near-term needs, portfolio risk and entry timing, a complimentary conversation with one of our advisers can help bring those decisions into one clear plan.