Lump Sum vs Dollar-Cost Averaging
You've got a pile of cash. All in today, or a slice each month? Simulate both, month by month — then throw a market crash at them and see which strategy survives it.
Your inputs
Balance trajectories
The core question
A bonus, an inheritance, a house sale — money arrives in a lump, and you have two honest options. Lump sum puts it all to work immediately. Dollar-cost averaging (DCA) feeds it in over months, buying at whatever prices show up along the way. The math question is simple: which ends up with more?
Why lump sum usually wins
Markets rise more often than they fall, so the expected return of any invested dollar is positive — which means time in the market is the whole game. Every month your cash sits on the sidelines waiting its turn is a month it isn't compounding. Vanguard's well-known study of this exact question found lump sum beat DCA roughly two-thirds of the time across markets and history. DCA isn't return maximization; it's regret insurance.
DCA: only the invested tranches work — the rest waits its turn
The one scenario where DCA wins: the shock
Set the market shock to −30% at month 6 and watch the verdict flip. A crash punishes money that's already invested and spares money still in cash — so the strategy with cash on the sidelines when the drop hits comes out ahead. That's the entire bull case for DCA: not higher returns, but a softer landing if the worst happens early. The shock input lets you price that insurance policy.
Worked example
$120,000, dripped over 12 months, 7% expected return, no shock. Lump sum finishes at roughly $128,675; DCA at $123,926 — a $4,749 gap, about 3.8%, bought purely by twelve extra months of compounding on the full amount. Add a −30% shock at month 6 and DCA wins by roughly $14,940 instead. Same inputs, opposite answer — the crash is everything.
Caveats worth knowing
- Constant return is a simplification. Real markets bounce around; the simulation uses one smooth rate so the strategy comparison stays clean. Volatility is what makes DCA's insurance valuable — and what makes lump sum's expected edge real.
- Ignores taxes. Both strategies are modeled pre-tax. In a 401(k) or IRA that's the whole story; in a taxable account, consult the tax math separately.
- DCA has a behavioral superpower the math misses. If investing everything at once would keep you up at night — or worse, make you sell in a panic — the "inferior" strategy you'll actually stick with beats the "optimal" one you'll abandon.