Should You Invest All at Once or Dollar-Cost Average?

Dollar-cost averaging is a common investment method that involves making asset purchases continuously over time, regardless of market conditions, according to Investopedia. It’s how many people save for retirement, most commonly by contributing to a 401(k) with each paycheck. This approach helps limit the risk of investing everything at a market peak and takes advantage of periodic market declines by buying at lower prices during those periods.

Why Lump Sum Investing Often Has Historical Advantages

For some investors, another option is lump sum investing. If an investor has a lump sum to invest, say a $2 million inheritance, investing all of it immediately has historically produced better results more often than spreading $2 million in purchases over several years. That’s because markets tend to rise. The S&P 500 has produced a positive annual return about 70% of the time over the past century, according to a Forbes analysis of the index’s long-term track record. Waiting to invest raises the odds that an investor will pay higher prices for stocks later. Another critical advantage of lump sum investing is compounding: the earlier an investor puts a bulk investment to work, the more time it has to generate compounded returns.

When Dollar-Cost Averaging Makes Sense

While lump sum investing generally has the odds in its favor, there are times when dollar-cost averaging can be a prudent strategy. Consider a 60-year-old who receives $500,000 as an inheritance. The same general rules apply: historically, markets have risen in approximately 70% of calendar years, meaning investors who delay purchases have often encountered higher prices later. However, investors may worry about putting a large lump sum into stocks that have recently posted returns well above normal and now carry high valuations. As of February 2025, the S&P 500 was trading almost 50% above its long-term average price, according to GuruFocus.

A Balanced Approach for High Valuations

In these circumstances, it may make sense to use a dollar-cost-averaging strategy for some of the purchases. Rather than investing the full $500,000 at once, a balanced approach could allocate 50%, or $250,000, upfront, acknowledging that markets have historically risen in approximately 70% of calendar years. The investor could then plan to invest the remainder over time to take advantage of any future pullbacks or corrections should they occur. Investors may also consider putting more money to work upfront in lower-priced assets such as value stocks, small-cap stocks, and international equities. CFA Institute has pointed to small-cap stocks as one way to address market concentration and lofty valuations, while research from Morningstar and other investment firms has highlighted the diversification and valuation benefits of international equities. This approach, which Savant’s investment management team builds into diversified portfolios, provides a measured way to gain immediate market exposure while maintaining diversification.

The Flexibility of a Longer Timeline

One advantage of an extended dollar-cost-averaging timeline is flexibility. Suppose an investor decides to dollar-cost average over 18 months, but six months into the plan, the market drops 15%. At that point, the investor could accelerate the timeline. A longer dollar-cost-averaging window allows for adjustments based on market conditions, similar to how Savant’s Q2 market review found that staying diversified and disciplined helped investors navigate changing market conditions during the quarter.

The Bottom Line

While investing a lump sum early is often the logical choice, dollar-cost averaging can be a useful tool, especially when market valuations are high. For those holding large amounts of cash today, it may make sense to use both lump sum investing and dollar-cost averaging together. Reach out to your Savant advisor with any questions you may have.

This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.