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  • Writer's pictureDaniel Lee

When Should You Invest via Lump Sum and Dollar Cost Average

Let’s talk about when you should invest via Lump Sum and when should you invest via Dollar Cost Averaging.

While there is an endless debate over which method is better, the suitability of the investment method largely depends on the market condition and the type of analysis that was conducted.


When to Lump Sum?

You should consider investing via lump sum if your investment operation focuses on bottom-up analysis and you can calculate, with a high degree of accuracy, the intrinsic value of the investment.



Doing so allows you to maximize your returns by capturing the differences between the current price and theoretical intrinsic value should the price correct itself to reflect the intrinsic value of the investment.


That said, while lump sum investing may provide higher returns if you can “time the market” accurately, it also exposes you to a higher risk of losses should you “time the market” inaccurately.

For example, if you were to invest in the MSCI World Index via the lump sum basis (2005 to 2020) if you “time the market”

  • accurately, the yearly return would be: 6.80%

  • inaccurately, the yearly return would be 0.1


When to D.C.A?

On the other hand, you should consider investing via dollar cost averaging if your investment operation focuses on top-down analysis and if you have difficulties in ensuring high accuracy in your intrinsic value calculation.



Doing so allows you to eliminate the probability of selecting the wrong entry price by averaging the cost price of your investments over a period of time.


By dollar cost averaging, you are now able to capture the long-term fundamental growth of the underlying investments and eliminate the ups and downs of the market that is driven by irrational short-term speculation.


That said, while dollar cost averaging may help lower your investment risk, it also limits your expected return to the long-term fundamental growth of the underlying investment. As such, you must select your underlying investment carefully.


For example, if you were to invest in the MSCI World Index via the dollar cost average basis (2005 to 2020), if you “time the market”

  • accurately, the yearly return would be: 3.96%

  • inaccurately, the yearly return would be 3.40%


All of these can also be found in my eBook: “The Price Of Financial Freedom” which will provide you with a comprehensive guide to help you achieve financial freedom and live life on your terms in the shortest amount of time.


You can download a copy of it for free on my website:


If you do not know how to get started with your financial planning or if you do not have the time to manage your finances, you can consider engaging an Independent Financial Advisor who can help you make sense of the market, accelerate your progress and achieve financial freedom by 5 to 10 years earlier!


To find out more information about how you can benefit from my financial and investment planning services, you can check out what I do on my website here:


Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).


Connect with me on social media platforms to receive updates on future content! You can also slide into my DMs if you have any questions :)





 

Disclaimer:

This article is meant to be the opinion of the author

This article is for information purposes only

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore


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