Is lump sum investing better
than dollar cost averaging?
Should we invest all of our
money at once or should we do
it over a certain timeframe?
That is what we are talking
about in today's video.
I am Tiffany Thomas,
a financially free
millionaire.
If you're looking to become
one of those,
make sure and hit that like
button and hit the subscribe
button,
and we are going to dive right
in.
Let's say your emergency fund
is already funded and you've
paid off your high interest
debt and you've come into a
lump sum of money.
Maybe you received an
inheritance or you sold your
home and you have a lot of
cash from that,
or maybe you got a bonus at
work or your business did
really well one month,
so you have this large amount
to invest.
Now,
should you invest it all at
once,
that would be a lump sum
investment,
or should you dollar cost
average and by dollar cost
averaging,
I am talking about investing a
certain amount for a specific
timeframe no matter the price
of the investment.
So if the price of your
investment was to drop one
month,
you would still invest.
If it was to go up the next
month,
you still invest.
If it was to go up even
further the next month you
still invest.
And then if it was to come
back down,
you still invest.
It is averaging out that cost
because you are continuing to
invest over a specific
timeframe.
To give you a specific
example,
let's say you have $12,000
sitting in your savings
account.
You would invest $1,000
every single month for a full
year.
That would be dollar cost
averaging.
And then on the flip side,
lump sum investing would be
taking that $12,000
sitting in your savings
account and immediately
putting all 12,000
into the stock market into an
investment.
Which one is better?
A lot of people would actually
say to dollar cost average to
hold onto that full 12,000
and slowly invest it over the
timeframe.
But studies show the opposite
is true.
You would actually make more
money by doing a lump sum
investment rather than dollar
cost averaging.
So they are saying that you
need to get your money
invested as quickly as
possible because you will make
more money over the long term.
And the stats on this are
about 71% of the time you'll
make more money by doing a
lump sum investment than doing
dollar cost averaging.
We are going to look at a few
examples and see exactly how
much more you would make if
you were to do a lump sum
investment.
But if you were thinking,
oh,
I don't even know what to
invest in,
I just did a training recently
in my Facebook group investors
to seven figures.
So I will leave a link below
to that group.
You can join the Facebook
group and watch the training
to get started investing in
the stock market.
Okay,
let's take a look at a few
different examples.
Okay,
so let's say we have $12,000
to invest and we're going to
leave this at months to Dollar
cost average at 12.
And then the total years we
are going to invest,
let's say we'll do 20 years
and then we can hit analyze
and we can see that the lump
sum wins,
you can see that it is at 71%
of the time versus the dollar
cost averaging way is 29% of
the time.
And then you can see our
average performance was
84,407.
And if you look over to the
dollar cost average side,
you could see that it's only
$80,948.
So a difference of about
$4,000.
Now let's say we have an even
larger amount,
maybe we received a really
nice inheritance of a hundred
thousand dollars and we're
going to invest that over a
period of 20 years still.
So if we click on analyze,
our average performance for
the lump sum is $703,392.
And then for dollar cost
averaging it is $674,563,
so around 30 grand.
And you may think that sounds
like a lot or not a lot,
but that is almost one
person's salary in a year.
So to me,
30 grand is quite a bit of
money.
And let's look at one more
example.
Let's say you sold a house and
it was all paid off.
So you have $500,000
to invest and this time we are
going to do it at 25 years.
So if we hit analyze,
the lump sum still wins and
our average performance is
$5,670,404.
And then if we come over here
to the dollar cost average
performance,
we can see that it's
$5,456,200.
So once again,
a quite,
quite a bit of money that we
are missing out on if we are
dollar cost averaging.
So we can see that by doing a
lump sum investment,
it really does outperform the
dollar cost averaging.
So if we are looking just
strictly at numbers,
we would always want to do a
lump sum investment rather
than try to dollar cost
average that money.
But personal finance is not
just about the numbers,
it's about ourselves as well.
If we are going to lose a lot
of sleep at night,
if we invest a lump sum of
$500,000
and then the very next day the
market goes down and we watch
that $500,000
drop and then it goes down
even further the next day and
it drops again and we get so
nervous that we sell our
investment and lose out on
that money that we could have
made if we would've just let
it stay in the stock market
and let it come back up over
time.
So if we are going to become
really fearful And sell that
investment,
if we start to see it drop,
then we definitely don't want
that to happen.
So we may not be able to
stomach investing a really
large lump sum.
We want to be able to sleep at
night,
but I wanted you to see that
you can make more money by
doing a lump sum investment
versus dollar cost averaging.
And maybe if you're not
looking at a $500,000
lump sum investment and it is
more around 10 grand,
maybe that is something that
you can stomach.
If you see it start to go down
after you invested the money.
But it wouldn't be by hundreds
of thousands of dollars,
perhaps you would be more okay
with that and you would not
lose sleep at night.
As you can see,
it is better to do a lump sum
investment rather than dollar
cost averaging.
Comment below and tell me if
you are going to do a lump sum
investment or if you'll still
dollar cost average.
I am curious to know,
and if you aren't able to
stomach the lump sum
investment,
realize that you can still
invest that money over time.
You can still dollar cost
average and make really good
returns.
It is going to be better than
leaving your money sitting in
a savings account earning
hardly any interest at all.
We don't wanna just keep all
of our money in a savings
account because that is not
safe,
because it is not even keeping
up with inflation.
We want to make sure and
invest our money,
whether that is doing a lump
sum investment,
if we can stomach that or
dollar cost averaging
investing our money over time,
whether the market is going up
or down,
it is more about time in the
market rather than timing the
market.
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Thanks so much for watching.
I'll see you in the next
video.