Is It Better to Invest Little by Little or All at Once?

When you have a significant amount of money to invest—say, from an unexpected windfall—you face an important decision. Should you invest it all at once (lump-sum investing) or spread it out over time (dollar-cost averaging)? If you’re looking to learn the “secrets” to investing before getting started, I’m sorry to report that there really aren’t any. While both strategies have their merits, like all things investing, it'll come down to your risk tolerance. Here's what to know about how to choose between lump sum investing versus dollar cost averaging.

What is lump-sum investing?

Lump-sum investing means investing your entire available amount immediately, rather than making smaller investments spread out over time. According to Experian, lump-sum investing outperforms dollar-cost averaging 75% of the time for stocks and 90% of the time for bonds. (That said, there's no way to predict future market performance, and past data doesn't guarantee future results.)

The reason is simple: Markets tend to go up over time. The longer you keep money out of the market, the more likely you are to miss out on potential gains. When in doubt, there's an old investing adage: "Time in the market beats timing the market." As long as you can stomach market volatility—watching your balance rise and fall at different times—lump-sum investing can have big rewards in the long run.

What is dollar-cost averaging?

If you're new to investing or generally more risk-averse, dollar-cost averaging (DCA) helps avoid the stress of trying to "time the market." DCA involves investing fixed amounts at regular intervals—say, investing $1,000 monthly over a year instead of $12,000 all at once. While it may not maximize returns, DCA minimizes regret if markets drop shortly after investing. Compared to the lump-sum approach, DCA is better suited for investors who receive regular income they want to invest, or who might panic sell during market downturns, or who simply prefer a safer, more structured approach.

How to choose your investment strategy

Consider these factors when deciding between these two investment approaches:

1. Risk tolerance. If market volatility keeps you up at night, DCA might be worth the potential sacrifice in returns.

2. Market conditions. During periods of high volatility or uncertainty, DCA can provide more peace of mind.

3. Time horizon. Longer investment horizons tend to favor lump-sum investing, as short-term volatility becomes less significant.

4. Source of funds. If you're investing a windfall (inheritance, bonus, etc.), lump sum might make more sense. For regular income, DCA could be more practical.

Some investors choose a middle ground, investing a significant portion as a lump sum while dollar-cost averaging the remainder. This approach can provide both the statistical advantages of lump-sum investing, plus the psychological benefits of DCA.

The bottom line

From a purely mathematical standpoint, lump-sum investing is the better choice most of the time. However, investing isn't just about numbers—it's also about sleeping well at night and sticking to your strategy during market turbulence. If dollar-cost averaging helps you stay invested and avoid emotional decisions, the slightly lower expected returns might be a worthwhile trade-off.

As always, the best strategy is the one you can stick with consistently over the long term. If you’re dealing with an abnormally large sum of money and are in a bit over your head, enlisting the services of a good financial adviser is a worthwhile endeavor.