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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.
CCWP119 3571374