Dollar-cost averaging versus lump sum investing

Key takeaways

With dollar-cost averaging, you invest the same amount of money on a regular basis, regardless of the price of the investment.
With lump-sum investing, you invest a larger sum all at once, hopefully when the investment price is lower.
There are benefits to both strategies.
Generally lump-sum investing outperforms dollar-cost averaging.

What is dollar-cost averaging and how does it work?

With dollar-cost averaging, you invest the same amount of money on a regular basis, regardless of the price of the investment.

It works this way. Say you invest $100 every month. In an up market, your $100 will buy fewer units, but in a down market, your money will buy more. Over time, investing this way can lower your average cost per unit — compared to what you’d have paid if you'd bought all your units at the same time when they were more expensive than the average.

Dollar-cost averaging benefits

Treats investing like a habit – When you handle investing like it’s a bill payment (through automatic payroll deduction or not) you won’t spend the money on something else or forget to invest.

Removes emotion from investing – Because you invest smaller amounts over time, you’ll be less likely to get upset if your investment falls in value.

Prevents poor market timing – Market timing is trying to buy your investment at its bottom price and sell at its top price. Dollar-cost averaging helps ensure your money is invested when the market surges.

Ideal for beginning investors – It lets you invest small amounts, avoid hype and inaccurate ideas and data about the markets, and keep your focus on your investing plan and long-term investment goals.

What is lump-sum investing?

Very simply, it’s investing a larger sum of money, all at once, rather than spreading it out over a longer time.

Lump-sum investing benefits

More money invested longer – When you invest in a lump sum, all the money you have to invest is in the market at once, so it can all potentially rise in value.

Keeps a long-term vision – Lump-sum investing is best for “set it and forget it” type people. They’re investing for the long haul and are okay with seeing a loss on their investments knowing they could be up in 20 years.

Which strategy is right for you?

Dollar-cost averaging may be for you if you:

Want to take emotion out of investing and avoid market timing
Wish to limit your investment risk over time
Are looking to lower the average price per share/unit of your investment
Are an inexperienced investor

Lump-sum investing may be for you if you:

Can take the emotion out of making investment decisions
Have a higher investment
Desire the highest potential investment returns
Are a more experienced investor

What's next?

Now that you know more about the pros and cons of dollar-cost averaging versus lump-sum investing, why not meet with your advisor to determine which strategy could best help you achieve your financial goals?
If you’re a member of a Canada Life employer-sponsored savings plan, we have licensed professionals who can assist you. Contact Canada Life to learn more.Opens in a new window

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.