Lump Sum Beats Dollar-Cost Averaging

Williams, Richard E.; Bacon, Peter W.
June 2004
Journal of Financial Planning;Jun2004, Vol. 17 Issue 6, p92
Academic Journal
The article focuses on a study which compared the annualized returns from various dollar-cost averaging (DCA) strategies with those produced by lump-sum (LS) investing from 1926 to 1991. The study is based on monthly total rates of return for the Standard & Poor's 500 Stock Index and 90-day treasury bills. The LS strategy assumes that the entire lump sum is invested in the stock market at the beginning of a 12-month holding period. For the DCA strategy it is assumed that the fund is initially invested in 90-day treasury bills and then shifted in equal monthly installments into the market proxy, Standard & Poor 500. Returns are then calculated and compared for each strategy at the end of 12-month holding periods. Taxes and transaction costs are ignored. The results show that LS outperformed DCA nearly two thirds of the time. The success of lump-sum investing was somewhat less during 1970-91 period because of the poor performance of the stock market during much of the 1970s. When coupled with the high interest rates that prevailed from the mid-1970s to early 1980s, the successes of a DCA strategy improved. However, even under these market conditions, the lump-sum strategy still outperformed the averaging strategy nearly six out of ten times. INSET: Editor's note.


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