Everyone has different levels of savings and views when it comes to investment. You could be a student, with a minimal amount of savings, but yet wish to dabble a little into investing. Or you could be an adult with sufficient savings to spare, but you’re trapped in this question: Is it better to invest in regular small pockets, or a huge lump sum all at once?
To explain this, I will be using the concepts of dollar-cost averaging and lump-sum investing. Do not worry if you’re not too familiar with these terms, they’ll be broken down into simple terms below!
The dollar-cost average strategy is when an investor divides up and invests in small pockets of money periodically in an effort to counter the volatility of the purchase. By buying in small amounts periodically, you are essentially averaging out your cost (prices might go high, or low, depending on the period you bought it).
This strategy removes much of the detailed work of attempting to buy the same asset all in one-shot at the best price.
- Smaller initial amount
- Lesser time commitment needed for monitoring
- Forces you to save regularly
- More transactions may lead to higher fees
- Potentially lesser returns than lump-sum investing
Lump-sum investing is more straightforward, it is the single investment of a sum of money at one go.
- Potential of outperforming dollar-cost averaging if done right
- Possibly lower fees due to lesser transactions
- More effort required to monitor the market
* In order to capture the best prices in the market
- Higher starting capital required to utilise this method
In essence, which method you employ is totally up to you, and both are not without their pros and cons. As usual, do your research carefully before you decide on which method to go for, and consult your financial advisor if you are not sure of the complete details of each method.
With both dollar-cost averaging and lump-sum investing targeting different investors with differing needs, I wouldn’t say one is better than the other.