Should one Dollar Cost Average or Lump Sum when investing via Robo-advisors?

Dear Anonymous

Thank you for your question. If we look at the history of the stock markets, we will realised that the stock markets rise 2/3 of the time. That being the case, investing a lump sum will do better than if you do Dollar Cost Averaging (DCA). However, as we all know, the stock markets do not go up in a straight line. There would be periods of ups and also periods of downs. And during those periods when markets are down, if you have invested lump sum, you will see your portfolios going down in value temporarily and your heart may not be able to take it. You may not be able to stay invested and as such get out at the wrong time and realise those losses.

By doing DCA, you would be able to smooth out the volatility of your portfolio and thus help you remain invested for the long term for a better investment experience.

So in a nutshell, invest with a lump sum if your heart is able to take the volatility of the markets. Otherwise, DCA might be better. But you might want to consider another option - what I call a blended option - For every one dollar that you can invest on a regular basis, invest say 70 cents. Set the 30 cents aside and accumulate it to a lump sum. Occasionally when the markets are down by say 10-20%, you can deploy those cash to take advantage of it. In this way, you are not trying to guess where the markets are going by doing regular investing and yet, you are keeping some powder dry to take advantage of the markets when it goes down.

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Hope this helps!

There is no hard and fast rule in terms of choosing between lump sum vs DCA. Another point to note is how long your investment horizon?

If you are generally looking at long term, 10+ years, both strategies would allow you to benefit if your underlying investment performs. The difference is the investment gains which also largely depends on how the markets move as a whole.

Well, for my personal opinion, given that the future outlook is not very certain and that 2017 had been a phenomenal year for investors, coupled with the fact that and economic crisis hasn't struck for the past 9 years, I would very much go for DCA. This is because most investors tend to pull out when their investment falls sharply. If the market does tank in the next year, the impact of your paper losses will be cushioned with a DCA strategy