What are the differences between lump sum vs dollar cost averaging?
Lump sum means investing a large amount of capital all at once, while dollar cost averaging means investing in small chunks over time.
This post is about the differences between lump sum vs dollar cost averaging.
Let’s dive into the top 3 differences between lump sum vs dollar cost averaging:
Lump Sum:
1. Higher Returns
Markets usually trend upward over the long-term. So investing in a lump sum could mean your money is working for you longer. This could mean more potential for gains.
2. Simpler
Investing in a lump sum, all at once, means you’re not actively managing the transactions. You’d only have to do it once or a few times as opposed to many times. This is a simpler approach and easier for those who don’t want to deal with too many investing transactions.
3. Lower Costs
Some brokerages still charge fees for the transactions. A one-time investment ultimately reduces fees for you. This is very similar to credit card transactions and how businesses are charged every time credit cards are used.
Dollar Cost Averaging:
1. Reduced Impact of Market Volatility
The market is known to fluctuate and can be rather volatile. Dollar cost averaging includes spreading out your investments across time, meaning you’d be purchasing shares at different price points. This can keep the average purchase price low over time.
2. Routine
Everybody loves a good routine, right? Routine investments can lead to building consistent investing habits, which is great for building long-term wealth.
3. Peace of Mind
Spreading out your investments in smaller chunks over time can take the emotions out of investing; therefore, providing more peace of mind.
To reiterate, the top 3 differences between lump sum vs dollar cost averaging are:
Lump Sum
- Higher returns
- Simpler
- Lower costs
Dollar Cost Averaging
- Reduced impact of market volatility
- Routine
- Peace of mind
There you have it! Interested in learning more about investing? Check this post out on how to buy S&P 500 index fund.
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