Know the different between dollar cost averaging and lump sum investing in stocks and find out which one is more profitable.
Buy stocks regularly or one time only? This is another series of lessons about how to start investing in stocks. Would you dollar cost average your capital or invest in lump sum? There is a big difference between the two especially about profits, losses and risks. There are investors who are looking for effective and proven investing strategies. One of their primary questions is which types of investments should they invest in (stocks, mutual funds, bonds) and if they do it the dollar cost averaging DCA or lump sum.
I have short explanation here in InvestmentTotal.com about the advantages and disadvantages of the two. If you are investing in stocks, you probably know about the possible loss of capital and the possible return on your investment which is higher than other investment vehicles. Stock is proven and popular among other types of investments. It gives higher return to your investment and can beat the inflation almost 4 to 5 times.
Dollar Cost Averaging or Lump Sum Stock Investing
Stocks can give you a gain per annum up to 25% or more, however, it is risky. Stock investing is rewarding and challenging. You have to do your home work, make a research, do a fundamental analysis, assessing the risk and a lot more things to do and to consider before making an investment decision.
Let the Number Speaks for Dollar Cost Averaging
Let’s take a look of the number given in the table. Analyze which one (lump sum investing or dollar cost averaging) is more profitable. In our example, John Doe decide to invest his $1,000,000 lump sum in stocks for 20 years and Mary Grace decided to invest regularly amounting to $4,167 per month within 240 months or 20 years. Both John Doe and Mary Grace investments are earning 15% in stocks every year.
Investor’s Name Investment Capital Total Investment After 20 Years
John Doe $1,000,000.00 $1,000,000.00 16,366,537.39
Mary Grace $4,167.00 $1,000,000.00 5,122,588.91
After 20 Years John Doe has more money than Mary Grace. John Doe $1,000,000 turned into astonishing $16.3 Million Dollars while Mary Grace has $5.1 Million Dollars. John Doe makes a profit of $15.3 Million Dollars while Mary Grace only $4.1 Million Dollars.
Lump Sum and Dollar Cost Averaging: Both Winners
When it comes to profits, lump sum wins. When it comes to long-term investing, they have both advantages or we can say they are both winners. But if there is a market crash, there is a sudden change to this data especially the number of stocks that Mary Grace can buy. When there is a market crash, the stock prices of course are low (advantage of dollar cost averaging method).
There are many things to consider when comparing lump sum investing versus dollar cost averaging such as the stock company, investment horizon, risks, convenience, etc.
The most important thing in investing is you are not wasting every single second, as we all know time is money. Thus, time can give benefits to those investors investing lump sum and dollar cost average through compound interest.
Investment Basis: Financial Goal, Financial Freedom
The answer to the question; which is better strategies, dollar cost averaging or lump sum investing? They have both advantages and disadvantages. Dollar cost average are suitable for investors who has no big amount of capital, you can buy more stock shares when the stock price is low. While lump sum investing can give you a huge profits if it’s done correctly and properly.
Always ask yourself; which strategies are suitable for you, invest based on your need and financial goal. The important thing is you are investing for your retirement and you will become financially free in the near future.
Investing Tips & Warnings
Ask the certified financial planner before you decide to invest. Consult with a certified financial planner to avoid investing mistakes. Do your own research, due diligence and investigation when investing. The data I have shown is for information purpose only to give you a number data about the future worth of a $1,000,000 after 20 years. It doesn’t guaranteed accuracy because when I calculate this data, I did not include the taxes involved in investing in stocks.
So if you will start investing, which do prefer? Dollar cost averaging or lump sum investing? Let me know your thoughts and opinions. Share them in the comment box below.