The story of why I chose dollar-cost averaging even though I knew 'lump-sum investing is more advantageous'
Should you invest 1 million yen all at once, or bit by bit?
I think everyone hits this question once when they first start investing.
“When you have a lump sum of money, should you invest it all at once, or should you spread it out over time through dollar-cost averaging?”
If you look it up online, it almost always says the same thing.
“Statistically, lump-sum investing has a higher expected return than dollar-cost averaging.”
I understand the logic. Since the market trends upward in the long term, putting in more money earlier means you get to enjoy the benefits of compound interest for a longer period. I have seen this explained many times.
But when I actually tried to do it with my own money, it wasn’t that simple.
In this post, I will write about the gap between theory and action that I felt after experiencing both “lump-sum investing” and “dollar-cost averaging” with mutual funds.
At first, I invested a lump sum without hesitation
When I started investing in mutual funds through NISA, I chose three: the S&P 500, All Country, and Developed Markets Equity Index. Honestly, I couldn’t narrow it down to just one, so I ended up buying all of them.
At that time, I invested about 1 million yen as a lump sum.
The reason was simple: I thought, “There’s no point in leaving a lump sum of money in my account.” Since the interest rate on regular savings accounts was almost zero at the time, I thought it was better to put it into the market as soon as possible rather than letting it sit idle. I made that decision to go with a lump sum without any hesitation.
After that, I switched to dollar-cost averaging
After investing that 1 million yen in a lump sum, I didn’t continue with the same method. From then on, I switched to a method of steadily investing a fixed amount every month, and I have been doing it for five years.
Why didn’t I choose to continue investing in lump sums?
The reason is that the nature of the funds changed. The initial 1 million yen was a “lump sum of surplus funds” that I had on hand because I was going out less during the COVID-19 pandemic and had paid off my car loan. On the other hand, the money I invested afterward was “continuous income” from my monthly salary.
I felt there was no need to use the same investment method for money with different characteristics. Honestly, I don’t think I could have kept it up if I had to make a decision to invest a lump sum every time I received my salary. Worrying about the timing of the purchase every month would have become a hurdle to continuing.
If I set it up as a monthly investment, I can automate that worry. I don’t have to think about whether the market is high or low every month. This was a huge relief mentally.
What I learned from lump-sum investing
The good thing about putting in 1 million yen as a lump sum is simply that ‘the amount of money invested is large from the start.’ Compared to accumulating from a small amount, having funds in the market from an earlier stage should work in my favor over the long term.
On the other hand, what I felt was a difference in my perception of price movements immediately after investing. When I am accumulating a few tens of thousands of yen every month, I don’t get very flustered even if the price drops a little. However, after putting in a lump sum, I felt more prone to worrying about even small price movements. The anxiety of ‘what if I bought at the peak today’ is something unique to lump-sum investing, I think.
As a result, looking at it on a five-year time horizon, the daily ups and downs meant almost nothing. However, it is true that for a while immediately after investing, there was a sense of tension that was different from when I was doing dollar-cost averaging.
Pros and cons of lump-sum vs. dollar-cost averaging
Organizing my own experience, I think there were these differences.
Lump-sum investing
-
Funds can be placed in the market quickly
-
Once you decide on the timing, you can just leave it alone
-
Your feelings are easily swayed by price movements immediately after investing
Dollar-cost averaging
-
No need to worry about the timing of every purchase
-
Compatible with continuous income like a salary
-
Compared to a lump sum, the pace at which funds enter the market is slower
Rather than one being superior to the other, my honest impression is that the types of funds suited for each are different.
In the end, which one should you choose?
Based on my experience so far, this is what I think now.
Lump sum for surplus funds, dollar-cost averaging for continuous income.
For money that you ‘can move right now and don’t plan to use for a while,’ such as bonuses, retirement money, or surplus funds found by reviewing your savings, I think it’s fine to put it into the market without worrying too much. While you are worrying, that money is not growing.
On the other hand, for ‘money that will continue to come in’ like a monthly salary, dollar-cost averaging is easier to continue without strain. This is because reducing the number of times you have to make a decision directly leads to ease of continuation.
In investing, not only the logic of returns but also ‘whether you can continue’ greatly influences the results. Even if you know theoretically that a lump sum is more advantageous, it is meaningless if you cannot continue. I chose dollar-cost averaging not to maximize returns, but to continue steadily for five years.
If you are currently wondering how to invest the funds you have on hand, I recommend asking yourself the following questions.
-
Do you have no plans to use that money for a while (over the course of several years)? → If not, it is suitable for a lump sum.
-
Will that money continue to come in from next month onward? → If it is a continuous income, it is suitable for dollar-cost averaging.
-
Do you have the peace of mind to leave it alone for several years even if the valuation drops immediately after a lump-sum investment? → If not, it is easier to continue if you start with dollar-cost averaging.
Lump sum for seed money, dollar-cost averaging for everything after that
Looking back, the approach I arrived at was not to choose one or the other, but to use them differently depending on the nature of the funds.
Put the initial seed money into the market as a lump sum. From then on, make the money coming out of your salary a dollar-cost averaging investment. The result of continuing this combination for five years is what has led to my current investment performance.
If there is anyone currently wondering how to invest a lump sum of money, it might be easier to make a decision if you think about it in terms of “Is this money seed money or continuous income?” rather than thinking in terms of a binary choice between “lump sum or dollar-cost averaging.”
After doing this for five years, I feel that there is no single correct answer to the “way” of investing, and that it is a accumulation of finding a form that you can continue without strain.