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01 Jun 2020

General Investing

Would you recommend DCA or lumpsum?

Discussion (10)

What are your thoughts?

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Pang Zhe Liang

01 Jun 2020

Fee-Based Financial Advisory Manager at Financial Alliance Pte Ltd (IFA Firm)

It depends on your investment objective and risk appetite. I have done a comparison between the two methods and you may read more about its pros and cons here.

More Details:

Lump Sum vs Dollar Cost Averaging

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Elijah Lee

01 Jun 2020

Senior Financial Services Manager at Phillip Securities (Jurong East)

Hi anon,

In the long run, markets trend upwards, so the lump sum approach would actually give the best results. But we also need to remember that not everyone has access to a lump sum right at the start of their investment journey. Most people will end up investing out of their free cash flow every month, which is where dollar cost averaging comes in.

DCA will work best when you have a long enough time frame. There is a Straits Times article behind a paywall, but I will link you to the chart here (which is based on back-tested info): https://www.straitstimes.com/sites/default/file...

What do you notice? We are looking at a timeframe of years on all the charts. Even in a U-shaped market, it takes 5 years for the market to return to where it was prior to the crisis. During the period where the market was headed south, it takes considerable nerve to enter the market, as your psychological frame of mind will likely be in a state of fear that it can go lower (if you aren't in that state of fear, then that's good for you, but it is not a common thing for most people looking to invest)

But if you do DCA, you will just go in the market without looking at the timing, and just hold your investments through the market cycle.

Let's examine DCA at the peak (top chart), entering at the peak over 2 years via DCA leads to a smaller loss compared to going in at the start with a lump sum (e.g. if you entered at the wrong timing). Consider this as averaging down.

On the 2nd chart, assuming you entered at the start of the graph thinking that prices were at a low already, you would only recover back to your initial capital after 5 years. But with DCA, you would be in profit already.

On the 3rd chart, entering at the start of the graph thinking that it was the low, then you would be right and rake in a substantial profit over time. However, DCA doesn't do too badly either, turning a profit over the same time frame.

What DCA really helps with is to smoothen your porfolio volatility and help to manage your nerves and emotions to some extend, which is equally important in investing. We are humans and we will definitely end up in instances where emotions guide our investment judgement and decision.

You can also adopt a hybrid method lump sum and DCA by splitting your capital into 3 portions, one to go in as a lump sum, one to go in gradually via DCA, and a war chest to add on during times of opportunity. This may help you to reduce your fear and ensure that you don't feel like you missed out.

In the end, time in the market is better than timing the market. DCA or lump sum, make sure you start something rather than sit and do nothing.

Whether DCA or lumpsum, I would say it really depends on the situation. Imagine a stock price is cli...

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