{"id":552,"date":"2021-08-30T12:00:00","date_gmt":"2021-08-30T12:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/what-to-do-with-a-lump-sum-of-cash-you-want-to-invest\/"},"modified":"2025-09-05T16:57:52","modified_gmt":"2025-09-05T16:57:52","slug":"what-to-do-with-a-lump-sum-of-cash-you-want-to-invest","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/what-to-do-with-a-lump-sum-of-cash-you-want-to-invest\/","title":{"rendered":"What Should You Do with a Lump Sum of Cash You Want to Invest? [2025]"},"content":{"rendered":"
\n

\u2026otherwise known as, the world\u2019s best problem to have.<\/p>\n

Maybe you just discovered personal finance education and you\u2019re walking through the world with your eyes wide open for the first time, suddenly painfully aware of the $40,000 sitting stagnant in your savings account earning $40 per year (0.01% interest).<\/p>\n

Or maybe you\u2019ve been dabbling in investing for a while, but you recently came into a large sum of money \u2013 from an inheritance, a bonus at work, or the sale of a property or asset.<\/p>\n

So what do you do?<\/p>\n

Do you invest the money all at once, or do you spread out your investments over time?<\/p>\n

\u201cDollar-cost averaging\u201d<\/h2>\n

\u201cSpreading out the investment contributions over time\u201d is also known as \u201cdollar-cost averaging,\u201d a term that gets its name from the fact that \u2013 by making equal contributions to buy the same asset over a predetermined period of time at a regular cadence \u2013 you\u2019ll pay the \u201caverage\u201d price for the asset over that period of time.<\/p>\n

Confusing enough?<\/p>\n

Think about it like this: If I have $100 to buy a bunch of apples, and apple prices are super volatile, should I just buy all the apples all at once, or should I buy one apple on the 5th of every month and pay whatever price the apple costs that day?<\/p>\n

While this is an imperfect analogy, I think it highlights that our intuition here may be wrong.<\/p>\n

You may<\/em> have thought, \u201cWell, I\u2019d just buy one apple per month. Because what if the prices are too high when I go to buy them all at once? Then I just overpaid for every single apple.\u201d<\/p>\n

The difference between our fictitious apple market (should we have used a sexier asset?) and the stock market, though, is that the stock market (S&P 500 specifically) spends about 54.86% of its days \u201cup\u201d from the previous day<\/span><\/a>.<\/span><\/p>\n

The takeaway? It\u2019s more likely to go up than down, historically speaking, so it\u2019s a safer bet to assume it\u2019ll only be higher in the future when you go to buy again, rather than lower.<\/p>\n

Think about it: By distributing a lump sum of money a little bit at a time every month for a predetermined period of time (maybe it\u2019s a year, maybe it\u2019s two years), you\u2019re essentially declaring that you think the market is going to go down<\/strong>. You think the assets you\u2019re buying today will be cheaper in the future, so you\u2019re waiting until the future to buy more.<\/p>\n

Investing is, at its core, an optimistic pursuit. We only do it because we have hope that the prices will (generally, over time) rise.<\/h4>\n

(I\u2019m oversimplifying for the sake of making a point, but wanted to flesh out that reasoning to its logical conclusion for the sake of the post \u2013 and because I like the #drama.)<\/p>\n

Forced dollar-cost averaging<\/h3>\n

Some of your investments will be forced into dollar-cost averaging; for example, if you make $5,000 per month and plan to invest $2,000 of it every month, you don\u2019t have the option to invest that annual lump sum of $24,000 upfront on January 1 \u2013 you don\u2019t have the money yet.<\/p>\n

In that way, every single month when you make your contributions from your income as it\u2019s doled out to you by your kind Corporate Overlord, you\u2019re dollar-cost averaging on accident.<\/p>\n

Today, we\u2019re talking about whether or not you should consider artificially applying the same periodic pattern to a big chunk of money you\u2019re sitting on, or toss it all in at once.<\/p>\n

Nick Maggiulli, the COO of a wealth management firm and author of a blog called Of Dollars & Data, demonstrates why lump-sum investing beats dollar-cost averaging, if you have the choice:<\/p>\n<\/div>\n

\"\"\/<\/p>\n

\n

You can find his entire analysis<\/em> <\/em>here<\/em><\/span><\/a>.<\/em><\/p>\n

Dollar-cost averaging underperforms the lump sum method by 7.5% on average. (He clearly has access to some of the fancier analysis tools that I\u2019m too cheap to pay for, because he was able to do the analysis I was trying to perform by trolling around personal finance subreddits looking for free calculator tools.) Not only that, dollar-cost averaging underperforms lump sum investing in 74% of the months analyzed.<\/p>\n

The only times that dollar-cost averaging won out was when the market was actively crashing, as prices were lowering (imagine all of society lost faith in your apples all at once and suddenly the prices plummeted for a few months; over those few months, you would\u2019ve been paying less per apple than normal, until faith was restored in the almighty Honeycrisp and apple markets rebounded).<\/p>\n

What this means for you<\/h2>\n

Majority of the time, you\u2019re going to be better off just investing your lump sum in an investment account all at once. Of course, we never really<\/em> know when a crash is coming, but if you extrapolate this type of decision over the course of a lifetime, we can imagine it\u2019ll look like this:<\/p>\n

Let\u2019s say you come into lump sums of money every 3 years (you lucky dog, you!) for the next 50 years. Let\u2019s say you\u2019re bought into the lump sum methodology, based on my compelling prose coupled with the aforementioned data.<\/p>\n

That means you\u2019d have roughly 16.6 opportunities to invest a lump sum.<\/p>\n

While (read this in an infomercial voice) past performance is not indicative of future returns<\/em>, let\u2019s pretend that the findings above can<\/em> be extrapolated forward: roughly 75% of the time, dollar-cost averaging will underperform your lump sum approach.<\/p>\n

But that means 25% of the time, dollar-cost averaging wins.<\/p>\n

So that means \u2013 in this mathematically sloppy example \u2013 you\u2019ll \u201coverpay\u201d for 4<\/strong> of the 16 lump sums you invest (25%), but you\u2019ll end up ahead and pay less for the other 12<\/strong>.<\/p>\n

Or, applied to apples (I regret this metaphor), you\u2019ll overpay for 4 bushels of your apples and \u201cunderpay,\u201d or get further ahead, with 12 bushels of them.<\/p>\n

But Katie, everyone says the stock market is going to crash soon!<\/h3>\n

There have been roughly 13<\/span><\/a> crashes since 1929.<\/p>\n

Do you know how many times a crash has been predicted? Just take a peek at quick google search for \u201cstock market crash 2019\u201d (there wasn\u2019t one), <\/p>\n

Here\u2019s a sampling of the articles that came up when I googled \u201cstock market crash 2019\u201d (spoiler alert, there was no crash in 2019):<\/p>\n<\/div>\n

\"\"\/<\/p>\n

\n

\u201cLeading investors and economists predicting a stock market crash in 2019.\u201d<\/p>\n

\u201c70% correction warning.\u201d (Meaning a 70% drop.)<\/p>\n

You know what actually happened?<\/p>\n

It went up. 29%.<\/p>\n

Here\u2019s a blurb from January 1, 2020 (which was, by the way, only three months before an actual<\/em> crash).<\/p>\n<\/div>\n

\"\"\/<\/p>\n

\n

If you\u2019re like, \u201cWe\u2019ve meandered so far from the original point. What are we talking about?\u201d<\/p>\n

I\u2019ll cut to the chase<\/strong>: Everyone\u2019s always saying a crash is coming. Why? Because eventually, a pundit will be right (it\u2019s just probability; eventually, one will call it correctly), and they\u2019ll make a career-minting press junket news tour out of their (random) accurate prediction.<\/p>\n

For example, say you would\u2019ve listened to some headline predicting a 70% crash in 2019, you likely would\u2019ve waited until early 2020 to invest when everyone was feeling optimistic about the market and then promptly experienced the drop in March when things actually did<\/em> go down, for reasons wholly unrelated to why 2019 doom-and-gloomers were calling it out.<\/p>\n

Nobody knows when it\u2019s coming, but you have data on your side to show that prices are more likely to go up than down.<\/p>\n

What would I do?<\/h3>\n

Everyone\u2019s circumstances are different but I\u2019m usually a lump sum girl, through and through. As soon as I get money to invest, I throw it all in there.<\/p>\n

And while you can\u2019t exactly put it all in your 401(k), you can<\/em> fill up other tax-advantaged accounts before jumping to a taxable brokerage account (if you haven\u2019t already). For example, if you have $20,000:<\/p>\n

    \n
  • \n

    $7,000 into a Roth IRA to max it out for the current year, if you haven\u2019t yet<\/p>\n<\/li>\n

  • \n

    $13,000 into a taxable brokerage account<\/p>\n<\/li>\n<\/ul>\n

    And that\u2019s all she wrote, folks. <\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

    \u2026otherwise known as, the world\u2019s best problem to have. Maybe you just discovered personal finance education and you\u2019re walking through the world with your eyes wide open for the first time, suddenly painfully aware of the $40,000 sitting stagnant in your savings account earning $40 per year (0.01% interest). Or maybe you\u2019ve been dabbling in […]<\/p>\n","protected":false},"author":178814,"featured_media":2442,"comment_status":"closed","ping_status":"open","sticky":false,"template":"si-template-single-post-taxable-investing.php","format":"standard","meta":{"footnotes":""},"categories":[35],"tags":[44],"class_list":["post-552","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-and-taxes","tag-taxable-investing"],"yoast_head":"\nWhat Should You Do with a Lump Sum of Cash You Want to Invest? 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