Dollar Cost Averaging or Lump Sum?

Spring 2021, by the CIO office (NBC)

MYTH

Investors contemplating investing a large amount (e.g. an inheritance) are better off spreading their entry over time (dollar cost averaging) rather than committing the full amount immediately (lump sum). 

REALITY

It depends. But since 1980, you would have been better off investing the full amount right away 85% of the time, while the decision to split the investment evenly over twelve months would have cost an average of 3.8% in lost returns. This simple study assumes a portfolio evenly balanced between Canadian bonds and global equities.

Of course, no one wants to put money to work right before a market correction, this myth being a prime example of one of the most well documented behavioural biases in finance: loss aversion. 

Yet, think of it this way. Would you invest in a strategy that loses 8 times out of 10 and by an average of 3.8%? After all, these are the historical properties of dollar cost averaging.

(data via Refinitiv) *50% FTSE/TMX, 25% S&P/TSX, 25% MSCI World 

The information contained herein was obtained from sources we believe to be reliable, but is not guaranteed by us and may be incomplete. The opinions expressed are based on our analysis and interpretation of this information and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed herein are those of the author and do not necessarily reflect those of National Bank Financial.

 

The securities or investment sectors mentioned herein are not suitable for all types of investors. Please consult your investment advisor to verify whether the securities or sectors suit your investor's profile as well as to obtain complete information, including the main risk factors, regarding those securities or sectors. This document is not a research analysis produced by the Research Department of National Bank Financial.

 

National Bank Financial is a subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX).

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