Lump Sum Or A Little Each Month?

Dave helps Jason know the benefits and pitfalls of investing a little each month versus in a lump sum.

QUESTION: Jason asks if it’s better to invest a little each month or in a lump sum.

ANSWER:
There’s a thing called dollar-cost averaging that is taught as people first learn about investing.  It basically means that as the mutual fund value goes down, your money will buy more shares as the market dips.  As the market cycles back up, your shares are more valuable and you’ve made more money.  You want the market to be down when you buy – buy low, sell high.  That’s dollar-cost averaging.

You want to be a steady investor so that you get the advantage of dollar-cost averaging.  However, if you’ve got the emotional maturity to leave your money alone, then dumping your money into mutual funds in a lump sum is the way to go.  You have to be mature enough to leave your money alone when you put in $100,000 one week and it goes down to $83,000 the next week.  You have to be able to leave your mutual fund investment alone for at least five years.  Mutual funds are a horrible short-term investment, but they’re an excellent long-term investment.