The research shows that investing a lump sum of cash is usually better than dollar cost averaging from a long term returns point of view, mostly because of having additional time in the market. DCA does reduce volatility and can be comforting psychologically, but I would personally rather just invest a lump sum of cash to maximize my time in the market.
However, I’ve been wondering if the calculus changes if someone had a large sum of equity in one particular stock, and they then wanted to move that capital to another stock or ETF? My initial instinct is that dollar cost averaging would be psychologically comforting in this situation. If someone was selling 100k of a stock all at once to immediately reinvest in something else, it would seem like this would open you up to big fluctuations in the prices of both holdings.
Lump sum investing with a pile of cash makes sense because you would otherwise be leaving that money out of the market for longer by DCA. With having to first sell equity by contrast, your money is already in the market whether you sell & buy all at once or do things in increments; it’s a matter of moving money between between different assets. I know that taxes play a role here and would have to be considered. I guess one could theoretically also incur higher commission fees by executing a greater number of trades, rather than one sell and buy order.
Does the lump sum vs DCA calculus change if you are selling equity instead of sitting on cash?
byu/abundantpecking ininvesting
Posted by abundantpecking
4 Comments
If your thesis is more time = more money, then why would it be different?
DCA doesn’t “reduce” volatility, it takes advantage of it. It definitely reduces emotional distress. The psychology of investing is more important than normies can understand.
You see it here all the time, just go back and look in down markets. The panic selling beginning of year. Most of those posts are deleted of course. The market timers deleting their evidence of their errors.
Everyone says they rather lump sum, until sp500 is down 17% (2022) and they flee to CD’s with haste…
There’s always a crisis going on. There’s always a good reason to be risk off. That’s the point of DCA, set and forget.
Reality is you should lump sum what you have, then have a DCA for the rest of your life for reasonable amounts.
If someone is investing right, there are never really large piles of cash anyways. Set and forget. Best of luck.
If the ETF you are buying has some favorable characteristics like higher expected return or lower volatility, then the lump sum method would fully realize these benefits as fast as possible. So logically lump sum is the way to go, but personally I’d go with DCA for the psychological safety.
Taxes are the only real issue, really. One cannot predict short term stock prices, so trying to game the result by adjusting timing of sales is usually a lost cause.
If I want to have X dollars in cash in two years to buy something, I’ll just sell X dollars of equity on day 1 and put it in a money market mutual fund. I would then draw from that as needed.