Dollar Cost Vs Lump Sum Investing

What is Dollar Cost Averaging?

Dollar Cost Averaging (DCA) is method of investing in stocks/ETFs consistently at a regular intervals of time - Weekly, Bi-Weekly, Monthly or Quarterly. In this method you may buy quality stocks/ETFs not based on the price but based on the assumption that if you can accumulate equity during highs and lows - your buy in price would be an average price.

The returns from this type of investing totally depends on the phase of market cycle. If the stock/ETF that you are accumulating is in the uptrend or in exuberance territory then your average goes up and your returns might not be excellent. On the other hand if you are able to capture a downturn then this phase might produce excellent returns.

One of the advantage of this method is you can cut the noise of stock market and get rid of any biases you may have.

Examples -

Scenario 1 - Mixed pricing

• Depending on the price fluctuation your returns will be determined.

• Accumulated 888 shares with a price difference per share of +4.49

Scenario 2 - Prices going up.

• Accumulated 816 shares with a price difference per share of +6.30

Scenario 3 - Prices Coming down.

• Accumulated 816 shares with a price difference per share of -4.70

Although in real world the prices don't move as indicated but these examples can give a fair understanding of what you can expect as returns. This methodology is about managing risk of not losing money. Best suited for circumstances where you dont know much about the industry or sector but you want to invest in it as there could be potential upside in future Examples - emerging sectors like Cryptos, NFTs etc.

What is Lump Sum Investing -

Lump Sum Investing is the process of buying stocks not based on time intervals but based on the price of the equity. In this method you would buy quality stocks/ETFs only when they are cheap and buy them in bulk with the money that you have saved for a period of time.The idea is to follow a set of companies and look for opportunities of mis-pricing. If the market is in exuberance and you don't find any investable deal then you dont invest and save money for a future investment.

Here the number of transactions/bets that you as a investor would undertake are far lower than any other form of investing. You would take far less bets with far more conviction. If done well this would be extremely advantages and can produce tremendous returns.

One of the advantage of this method is you would be making your investment decisions based on the knowledge and sentiments.

Examples -

Same scenarios as dollar cost averaging, but the only difference is the assumption that we were able to nail the lowest price for a given stock and buy it as a lump sum investment.

Scenario 1 -

• You get 1714 stocks in lump sum whereas you just got 888 in dollar cost averaging method

• Cost difference per share is $11

Scenario 2 -

• You get 1200 stocks in lump sum whereas you just got 816 in dollar cost averaging method

• Cost difference per share is $11

Scenario 3 -

• You get 1200 stocks in lump sum whereas you just got 816 in dollar cost averaging method

• Cost Difference per share is $0

Comparing the two methods, Lump sum investing obviously has a upper hand as you are bound to invest only when there is value, only when there is discount and downside risk is minimal. But as mentioned if you dont have all the knowledge to invest in a sector then you can also look at dollar cost averaging.

Disclaimer: I wrote this article myself, and it expresses my own opinions. This is not meant as a investment advice. Please do you own investment research and follow approach that suits you best. Good luck!