The Cost of Waiting

Why It’s Better to Invest Conservatively Now Than to Average-In

Photo: Pixabay

Earlier this year I wrote a piece illustrating how it is almost always optimal to invest a large sum of money right away rather than “averaging-in” over time.  Sitting in cash (or even in T-Bills) simply doesn’t pay compared to the markets because most markets have a long term positive trend.

Despite the mathematical soundness of my arguments, many people told me privately that they still felt wary about investing lots of money at once because they feared a market crash.  My recommended solution to address this fear was simple—go all-in, but do it in a more conservative portfolio.

So, if you truly wanted to be invested in 100% stocks (but you were worried about a market crash) it would be better to put it in now into a 80/20 stock/bond portfolio instead of dollar-cost averaging into an all-stock portfolio over time.

But this recommendation got me thinking.  How conservatively can you invest a Lump Sum and still outperform dollar-cost averaging (“DCA”)?  Could a Lump Sum investment into a 60/40 portfolio beat DCA into an all-stock portfolio over 24 months?  What about a Lump Sum into a 40/60 or, god forbid, an all-bond portfolio?  Where is the limit?

In my prior post on Lump Sum investing I kept the portfolios constant, but varied the buying period (i.e. how long it took you to average-in) to demonstrate that a longer buying period leads to more underperformance (compared to doing a Lump Sum).

In this post I am going to keep the the buying period constant (at 24 months), but will vary the conservativeness of the portfolios (from 100% stocks to 100% bonds).  This will allow me to see how a Lump Sum investment in a more conservative portfolio compares to DCA into an all-stock portfolio.

My results show that any stock/bond portfolio combination (even a 100% bond portfolio!) would have, on average, outperformed a 24-month DCA into an all-stock portfolio.  If that statement doesn’t shock you, let me make it more concrete.

Let’s say you had $2.4M you wanted to invest in the S&P 500, but you were too shy about going all-in now.  So, you decide to invest $100,000 a month for the next 24 months.  My analysis shows that you would have been better off had you invested all $2.4M into any stock/bond portfolio combination (80/20 stock/bond, 20/80 stock/bond, etc.) at the beginning instead of averaging-in over time.

For example, the plot below shows the relative performance of DCA (into 100% stocks) compared with a Lump Sum (“LS”) investment (in a 60/40 portfolio) over 24 months:

dollar-cost averaging relative performance versus lump sum into 60/40 stock/bond portfolio over time

As you can see, in most cases the DCA into 100% stocks underperforms the Lump Sum investment into a more conservative 60/40 portfolio.  Looking at the distribution of DCA outperformance compared to the Lump Sum over all 24-month periods from 1960-2018, we can see this more clearly:

distribution of dollar-cost averaging relative performance versus lump sum into 60/40 stock/bond portfolio over time

As you can see, doing DCA into an all-stock portfolio over 24 months can’t compete with the initial investment into a 60/40 stock bond portfolio.  Why?  Because the DCA cash on the sidelines earns nothing.

But, this is just the tip of the iceberg.  Even as we increase the conservativeness of the portfolios (i.e. add more bonds), they still outperform the DCA into an all-stock portfolio on average:

distribution dollar-cost averaging relative performance versus lump sum into various portfoliosIn the most extreme example (i.e. a Lump Sum investment into a 100% bond portfolio), the Lump Sum outperforms DCA by 0.9% on average and in nearly half of all 24-month buying windows:

distribution of the relative performance of dollar-cost averaging to lump sum investing in a all-stock versus all-bond portfolio

Think about how profound this is.  Over the last 60 years there has basically been a 50-50 shot that a 24-month DCA into an all-stock portfolio would underperform an initial Lump Sum investment into an all-bond portfolio!  This is nuts.  No investor who eventually wanted a 100% stock allocation would start by going 100% into bonds.  But this shows that even if they had done such a ridiculous thing, they would have been roughly the same off.

And these results generalize when you DCA into any stock/bond portfolio over any buying window.  So if you have a client who just earned a big windfall and wants to average into to an 60/40 portfolio over the next few years, please stop them.  They would be far better off (monetarily) if they just put all of that money to work now in a more conservative portfolio (i.e. 50/50, 30/70, etc.).

You can make their portfolio as conservative as they want, as long as you get them to invest.  That’s the important part.  As the phrase goes, “Time in the market beats timing the market.”  Why?  Because every day your money isn’t working for you, it is inflating away.  With 2% annual inflation, you lose half a basis point (0.005%) on your cash holdings day in and day out.

This is why dollar-cost averaging in this context makes absolutely no sense.  Because even an extremely conservative portfolio invested immediately will likely outperform DCA.  So, if you need to invest lots of money now, but are afraid of possible short-term losses, then ratchet down the risk in your portfolio and put your money to work.

Because the only way to avoid the cost of waiting is to not wait.


Every time I do a rigorous mathematical analysis like the one above I always, I repeat, ALWAYS, get someone who tries to nitpick it to death.  They might say something like, “Well that’s nice and all, but this wouldn’t be true if the DCA cash on the sidelines was invested in T-bills.”  First off, delete your account.  Second off, I love how these people think that if they can find one slight counterpoint to my analysis then everything I said is worthless.

Do you think they actually ran the numbers to see if their theory is true?  No, they didn’t.  But, guess what?  I did.  And even if the sideline DCA cash is invested in T-bills, my general conclusion is unchanged.  Yes, on the margins there are some minor differences, but my point about investing now into a more conservative portfolio (rather than DCA) stands.

More importantly though, when someone claims that I forgot to include the return on T-bills on the uninvested DCA cash, they are forgetting about the psychological component of investing.

Think about it.  If someone is too timid to invest in the stock market right away, do you think that person is going to have the ability to implement a T-bill ladder on their uninvested money over the next 24 months?  Hell no.  They are going to sit in cash.  Talk to real advisors with real clients facing these kinds of issues and they will tell you the exact same thing.

Anyways, I appreciate your time, even if you plan on “Actually-ing” me.  Thank you for reading!

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This is post 142. Any code I have related to this post can be found here with the same numbering:

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73 Responses

  1. Anonymous commented on Sep 17

    I really liked the “Actually” section! I recently experienced something similar and have to say that you are absolutely right!

  2. Anonymous commented on Sep 17

    Actually, ….oh, never mind.

  3. Anonymous commented on Sep 17

    phenomenal and thank you for the follow-up. i do think that no matter what the math says going all-in is scary psychologically for anyone. this offers a more appealing alternative. thanks for sharing your research.

  4. Anonymous commented on Sep 17

    Nick – another great article. What would you say to the investor who wanted to keep “dry powder on the ready” (say 50%) for the relatively frequent 10-15% market corrections (buy the dip)? The idea being that 50% be invested up front, the remaining 50% invested in the DCA approach until the dip occurs, at which point they buy all in. Do the mathematics based on past market performance support this approach or are you still better off with the up front lump sum approach?

    • Nick Maggiulli commented on Sep 17

      Waiting has historically always been suboptimal because many times that dip never comes (or when it does come prices are far higher than when you started). Imagine you wanted to buy a big dip in the markets (>30%) starting in 2012. As of right now (7 years later) you would still be waiting.

  5. Anonymous commented on Sep 17

    All depends on the market cycle and your timeline.

  6. Anonymous commented on Sep 17

    You are as brilliant as usual.
    I just wonder how do you explain that Warren Buffett is ‘actually’ sitting on 122 billion in cash as of last month though?
    Slightly off-topic: will you care to write about technical analysis or options trading vis-a-vis an average Joe Investor? Should he have anything to do with these?
    Many thanks.

    • Nick Maggiulli commented on Sep 17

      Thank you for the support. I wouldn’t touch options/technical analysis. Very few people can succeed in it over a long time period.

      As for Warren Buffett, he’s Warren Buffett, you and I aren’t.

  7. Anonymous commented on Sep 17

    Nick. Great post, no actually required. A diffferent consideration though, since you’re in RIA land. What is the career risk to the advisor that pumps it all in and has very bad timing luck vs the career risk of marginally underperforming due to the math you’ve laid out? I’m an individual investor, but advisor behavior I’ve witnessed in others is about keeping the client happy and the advisor keeping the ongoing fee. I can’t see a client that suffers a quick 15% decline ever being able to be shown the math and accepting it as a good decision after the fact.

    • Nick Maggiulli commented on Sep 17

      This is a great counterpoint. Some clients will be upset if they experience a quick decline though they won’t bat an eye if the market rips upward while they are sitting in cash. This is why educating the client and ratcheting down the risk are both essential parts of this conversation.

  8. Anonymous commented on Sep 17

    This is great for people who are rational… but for those clients who are so adamant about avoiding large LS investing, DCAing into the agreed upon plan/strategy is sometimes the only “optimal” decision, because fighting too hard results in the client either sitting in cash forever or sitting with some insurance agent “Advisor” selling them an Indexed Annuity.

    The “return on sanity” is greater than the lost investment opportunity cost in this type of situation.

  9. Anonymous commented on Sep 17

    I did read the post. Did you read my comment? Specifically “for those clients who are so adamant about avoiding large LS investing”.

    Even if you do recommend reducing risk substantially, some people will still scoff at investing everything at once.

  10. Anonymous commented on Sep 17

    Now do Japan lol. But seriously would you reach a different conclusion with a globally diversified portfolio. S&P 500 has been an outlier in terms of performance and not something I would bet on going forward.

  11. Anonymous commented on Sep 17

    Good article Nick. Just my 5 cents: you are talking about better returns in lump sum investing vs. DCA, but I think that you are missing to compare the “risk profile” of both types of investment. IMHO, without being an expert like you are, investing is not only looking for the best “return” but searching the best risk/return adjusted investments.

    • Nick Maggiulli commented on Sep 17

      Yes, risk adjusted returns matter. Calculating this at scale is far more complex computationally so I haven’t done it yet. I plan on it one day.

  12. Anonymous commented on Sep 18

    Fantastic article! Thank you very much! I’m in a situation as you describe with a large amount of money waiting to be invested. The record high prices now give me vertigo and I’m reluctant to put it all in. It seems as if it can’t go any higher… But your maths are unbeatable and I guess I should just do it! Thank you for the insights.

  13. Anonymous commented on Sep 18

    This post would be a great answer to Peter Thiel’s famous question – “What important truth do very few people agree with you on?”

    Love it! One of your best data validations so far 🙂

  14. Anonymous commented on Sep 18

    Let’s try to get from the theory to practice. I happened to receive a lump sum. It will become a major part of my retirement nest. I’m 65 and plan to retire soon. I understand your sentiment – for most people and situations the probabilistic approach and the numbers say invest the lump sum. But how do I know that I won’t become that statistical minority that will invest a lump sum at the market’s top and wait 4-5 years to just recover (like in the last two recessions)? I won’t be able to draw anything over that long period of time. Or if I do at the lows (which I will probably have to), I’ll completely destroy that investment.

    I think that in my particular case and for my risk tolerance level, waiting (or rather DCA-ing) is like buying insurance. Yes, the chances that it’s money left on the table are high but it’s worth the peace of mind. Am I wrong?

    • Nick Maggiulli commented on Sep 18

      You are not wrong about investing in an all-stock portfolio, but have you considered investing in a far more conservative portfolio (compared to your target allocation) now?

  15. Anonymous commented on Sep 18

    Hey Nick,
    I just read your article and it was the thing that pushed me into a trade for a high dividend stock (closed end fund invested in infrastructure with a 7% yield). I dumped a CWS recommended stock to get into it because the dividend yield and the DRIP will out perform just waiting.
    Thanks for the push!

  16. Anonymous commented on Sep 18

    Do you think your findings apply to averaging down on a portfolio of individually selected stocks? Your argument seems very solid for a portfolio of ETFs and Bonds but I wonder what it looks like for averaging down into individual stocks, this is of course very difficult to test (if not impossible), but I am interested in your thoughts.

    • Nick Maggiulli commented on Sep 18

      Makes no difference. If the assets have a positive long-term trend, then the math is the same. The question is: Can you pick a set of stocks that have a more positive long-term trend than the market? Good luck.

  17. Anonymous commented on Sep 18

    Great article. Investor behavior is 99% of return.

  18. Anonymous commented on Sep 19

    Great article Nick, thank you for your work!

    I was especially surprised to see that a 100% bonds portfolio has a 50% chance to overperform a DCA 100% stocks within two years period.

    Did you by any chance run the date with more “global” indexes? (for example MSCI ACWI for stocks and a bond equivalent, maybe the benchmark of the Vanguard Global Bond Index Fund).

    I am an European investor and right now, with so many yields from government bonds in negative area, I don’t feel very comfortable going all in in this scenario, or taking a big exchange rate risks going on the US treasuries.

    But maybe the numbers would prove me wrong 🙂

    Would appreciate your insights and keep up the great work!

  19. Anonymous commented on Sep 19

    Most of the benefits I’ve read about Dollar Cost Averaging apply to retirement accounts where you have years or decades for your account to grow.

    I’ve never received a windfall, but if I did, I would invest it as soon as I could. I wouldn’t even consider spreading out my purchases, whether stocks or bonds.

  20. Anonymous commented on Sep 20

    I’ve seen this work both ways. Typically my investments in the broad market (diversified) have benefited from the all-in strategy – works great in a bull market. However, investments in industry sectors is riskier – take energy over the last several years – DCA works better.

  21. Anonymous commented on Sep 20

    “Because the DCA cash on the sidelines earns nothing.” You should assume the cash on the sideline earns a competitive bank interest rate, anybody who bothers to consider these types of scenarios probably is also trying to get a decent-to-great return on cash in the bank…. don’t know if that would materially change the analysis or not. Like Ally offers 1.9% on savings, that anybody can get….

    • Nick Maggiulli commented on Sep 20

      Read the full post and you will see that I did consider this and it only changes things on the margin.

  22. Anonymous commented on Sep 21

    Many investors who believe are doing DCA investing what they are actually doing is investing a lump sum (all their available $ at the time) multiple times over the course of time.

  23. Anonymous commented on Sep 22

    Sensible information. I suspect that current Central Bank policies around the world will results in very unpredictable returns over the next 10-20 years. Equity prices are historically very high and bond prices are insane. I prefer equities over all else now, but I would rather hold cash than bonds these days.

  24. Anonymous commented on Sep 22

    Hey Nick, great post & great blog, thanks for making it.

    I’m intrested, intuitively, what do you presume would happen if you compared value averaging to lump sum? Should the results change dramaticlly?

    • Nick Maggiulli commented on Sep 23

      I have seen the math behind value averaging and it makes sense, but it can be difficult to apply consistently because it requires a huge cash reserve up front. Imagine you started value averaging in 2008 and then the markets crashed. Where are you going to get all this extra cash to invest when the market is down? It would be that much harder if you lost your job or were hit with other difficult economic circumstances. So, value averaging is great in theory but could be quite difficult in practice.

  25. Anonymous commented on Sep 23

    Do you have the comparable numbers for 6, 12 and 18 months?
    The research I’ve seen on dca seems to suggest a sweet spot at about a year.

    • Nick Maggiulli commented on Sep 23

      There is no sweet spot effect. Longer time periods => more underperformance by DCA (when compared to Lump Sum). For a 12-month buying window the results are less severe, but my conclusion is unchanged. How can I claim this? Because the market (generally) is in an upward trend so waiting is suboptimal in most cases. This is true whether you wait 1 month, 12 months, or longer.

  26. Anonymous commented on Oct 10

    Hi Nick – I love reading your posts. As an investor myself your findings are clearly very intriguing…I generally invest in ETFs, preferring a Vanguard growth ETF for my equity exposure. In terms of bond exposure, what proxy would be good to use…TLT, LQD, IEF? Thank you!

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