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When you go to the beach, do you run full steam into the water, or do you slowly tiptoe in? Those different approaches have a parallel in the investment world: lump-sum investing and dollar-cost averaging (DCA).

Lump-sum investors put money to work by plunging into an investment all at once. By contrast, investors who use DCA gradually put their money to work in equal increments over a fixed period of time (e.g., six months, one year, etc.). During volatile markets, DCA can help an investor systematically accumulate more shares as the market fluctuates.

 

Scenario 1: Market Decreases in Value

The scenario below contrasts investing $100,000 using DCA vs. a lump sum when share prices are falling over one year.

DCA Investor
  Investment Share Price # of Shares
First Quarter $25,000  $200 125
Second Quarter $25,000   $194 129
Third Quarter $25,000   $188 133
Fourth Quarter $25,000   $180 139
    Average
Share Price:
$191
Total Shares
Purchased:
526
       
Total Investment $100,000     
Ending Value $94,632    
Loss -$5,368    
Total Return -5.37%    
Lump-Sum Investor
  Investment Share Price # of Shares
First Quarter $100,000  $200 500
Second Quarter $0   $194 0
Third Quarter $0   $188 0
Fourth Quarter $0   $180 0
    Average
Share Price:
$200
Total Shares
Purchased:
500
       
Total Investment $100,000     
Ending Value $90,000    
Loss -$10,000    
Total Return -10.00%    

Past performance does not guarantee future results. Ending values may differ from totals provided due to rounding. The performance shown above is for illustrative purposes only. Source: Hartford Funds, 5/24.

 

The investor who used DCA fared better because the average share price ($191) was lower than the lump-sum price ($200).  

 

Scenario 2: Market Increases in Value

The scenario below contrasts investing $100,000 using DCA vs. a lump sum when share prices are rising over one year. 

DCA Investor
  Investment Share Price # of Shares
First Quarter $25,000  $180 139
Second Quarter $25,000   $186 134
Third Quarter $25,000   $192 130
Fourth Quarter $25,000   $198 126
    Average
Share Price:
$189
Total Shares
Purchased:
530
       
Total Investment $100,000     
Ending Value $104,894    
Gain $4,894    
Total Return 4.89%    
Lump-Sum Investor
  Investment Share Price # of Shares
First Quarter $100,000  $180 556
Second Quarter $0   $186 0
Third Quarter $0   $192 0
Fourth Quarter $0   $198 0
    Average
Share Price:
$180 
Total Shares
Purchased:
556
       
Total Investment $100,000     
Ending Value $110,088    
Gain $10,088    
Total Return 10.09%    

Past performance does not guarantee future results. Ending values may differ from totals provided due to rounding. The performance shown above is for illustrative purposes only. Source: Hartford Funds, 5/24. 

 

The lump-sum investor fared better because the purchase price ($180) was lower than the DCA average share price ($189).

 

Scenario 3: Full-Market Cycle

The scenario below contrasts investing $200,000 using DCA vs. a lump sum over a full-market cycle (i.e., the declining market in Scenario 1 followed by the rising market in Scenario 2).

DCA Investor
  Investment Share Price # of Shares
First Quarter $25,000   $200  125
Second Quarter $25,000   $194 129
Third Quarter $25,000   $188 133
Fourth Quarter $25,000   $180 139
Fifth Quarter $25,000  $180 139
Sixth Quarter $25,000  $186 134
Seventh Quarter $25,000  $192 130
Eighth Quarter $25,000 $198 126
    Average
Share Price:
$190
Total Shares
Purchased:
1,056
       
Total Investment $200,000     
Ending Value $208,989    
Gain $8,989    
Total Return 4.49%    
Lump-Sum Investor
  Investment Share Price # of Shares
First Quarter $200,000   $200  1,000
Second Quarter $0   $194 0
Third Quarter $0   $188 0
Fourth Quarter $0   $180 0
Fifth Quarter $0  $180 0
Sixth Quarter $0  $186 0
Seventh Quarter $0  $192 0
Eighth Quarter $0 $198 0
    Average
Share Price:
$200
Total Shares
Purchased:
1,000
       
Total Investment $200,000     
Ending Value $198,000    
Loss -$2,000    
Total Return -1.00%    

Past performance does not guarantee future results. Ending values may differ from totals provided due to rounding. The performance shown above is for illustrative purposes only. Source: Hartford Funds, 5/24. 

 

Bottom Line: If you have the foresight to invest when the market is at or near a bottom, lump-sum investing would likely give you better results than DCA. But timing the market is nearly impossible, and markets are typically volatile. Therefore, DCA can be a prudent way to get invested—and stay invested—during volatile markets. 

 

Talk to your financial professional to discuss the potential benefits of DCA in volatile markets.  

 

Investing involves risk, including the possible loss of principal. For illustrative purposes only. Dollar-cost averaging neither assures a profit nor protects against a loss. Because systematic investing involves continuous investing regardless of fluctuating price levels, you should carefully consider your financial ability to continue investing through periods of fluctuating prices. 

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