Dollar cost averaging and lump sum investing: Time in the market is key
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Key takeaways:
- It is more profitable to lump sum invest at the start of an ascending market rather than periodically invest over time.
- Consider automatically investing a fixed portion of your paycheck monthly.
Most physicians receive a regular paycheck, and sometimes receive a lump sum such as a bonus. A proportion of both should be invested. How should one invest a portion of their regular paycheck?
Investment portfolio
A large chunk of one’s investment portfolio is funded by regular, fixed injections of money from their paycheck. This money is being “dollar cost averaged,” meaning that a predetermined amount of invested money buys more when the market is down and less when the market is up.
In a volatile market, this strategy allows one to achieve a higher return compared with a single lump sum investment at the start of a descending or volatile market. Further, dollar cost averaging takes investment psychology out of the equation.
It is natural for us to want to buy more stocks when there is excitement about a rising market and sell when stocks are tanking. Indeed, we should do the opposite of what our gut suggests and buy more when stocks are on sale and less when they are full price.
Bonuses and other windfalls
In an ascending market, it is more profitable to lump sum invest at the start of the ascent, rather than periodically invest over time (dollar cost average). Of course, no one can predict the future whims of the market.
But the key is time in the market, not timing the market. Thus, for long-term investors, invest lump sums into your predetermined asset allocation (eg, 80% stocks/20% bonds).
Set it and forget it
We encourage investors to automatically invest, such that a fixed portion of one’s paycheck is automatically invested every month or at an interval of one’s choosing. This can be done by linking one’s checking account to one’s brokerage account, with instructions on the amount to be automatically invested into one’s predetermined asset classes.
For more information:
Chirag P. Shah, MD, MPH, is a soccer and Nordic ski coach, who also practices medicine and teaches in Boston. He can be reached at cshah@post.harvard.edu.
Jayanth Sridhar, MD, is an award-winning podcaster, physician and educator who is chief of ophthalmology at Olive View Medical Center in Los Angeles. He can be reached at jsridhar119@gmail.com.
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