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There are many different ways you can deploy your money to invest. By far, the 2 best ways are dollar cost average and lump sum investing. In this video, I’ll discuss why lump sum investing wins, and why so many people are telling us to dollar cost average. I’ll share which strategy I personally use. Enjoy!
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0:00 – Intro
0:59 – Lump Sum Invest explanation
Lump sum investing is just deploying your money all at once, then hope that the stocks went up.
1:48 – Dollar Cost Average explanation
Dollar cost average is splitting your money and slowly invest into the stock. After a while, you will get the average price of the stock.
2:25 – Market Goes Up
If you have lump sum invested when the market is going up, like in March 2020 after the big crash, you would have been able to make a handsome profit. But if you had just dollar cost average in, you would make much lesser profit. So, when the stock is going up, lump sum investing wins.
4:29 – Market Goes Down
When the stock is going down, if you have lump sum invested, you would have been stuck at the peak. But if you had just dollar cost average, you would be able to bring down the average cost and perhaps you would be in the green now. So, when stock is going down, dollar cost average wins.
5:19 – Market Goes Sideways
There are few times in history where the market has been going sideways for a very long time. For example the lost decade in the S&P500, where the market was trading sideways between 1999 to 2009. Same for STI ETF, Japan market, Italy market and others. In this scenario, dollar cost average would win.
6:28 – What Study Says
In a study by Vanguard, it was found that over the long term, lump sum investing wins two-thirds of the time. It doesn’t matter what kind of portfolio you choose, whether it’s 100% stocks or 100% bonds, lump sum investing wins.
But if we look carefully, even though lump sum investing wins most of the time, it’s only won by a small amount, around 2%. In the article, they also pointed out that emotions are important in investing. If you have used dollar cost average, you would have been less emotionally affected if the stock dropped.
8:27 – My Strategy
The simplest way is to use dollar cost average. It’s almost impossible to time the market, so I would not even try. But we can go 1 step further. While we use dollar cost average to buy into the stock consistently, we can put aside some money into our warchest. If and when the stock drops, if we are sure that it is a good stock, we can use lump sum investing to buy in cheaply. Riches are made in recession, when stocks finally recover like they always do, we will be rewarded well.