Another Look at Lump-Sum versus Dollar-Cost Averaging

Grable, John E.; Chatterjee, Swarn
September 2015
Journal of Financial Service Professionals;Sep2015, Vol. 69 Issue 5, p16
Academic Journal
Debate regarding the efficiency of dollar-cost averaging (DCA) has persisted over the years. In this column we are going to add to the debate by showing that depending on the market and investor, DCA can sometimes be a smart investing tactic and occasionally an inefficient allocation approach. An investor who strongly believes that a bull market is about to begin, or one who is making an investment during the early stages of a bull market, should use a lump-sum strategy. Obviously, making such a prediction is no easy task. It turns out then that making a lump-sum investment requires a relatively high level of risk tolerance (low risk aversion). When working with clients who have less tolerance for financial risk, a DCA strategy provides a way to outperform if a bear market, rather than a bull market, emerges. Even if a cyclical bull market occurs, the opportunity cost is not that large. In the final analysis, the advantages of a DCA approach match well with the needs of average investors.


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