Morningstar - Q1 2020 - 49

Even in Bumpy Markets, Lump-Sum Investing Comes Out Ahead
The argument for lump-sum investing over dollar-cost
averaging may seem counterintuitive at first,
but the logic is simple: In a market that goes up, as U.S.
large-cap stocks have done over the past 100 or
so years, the longer investors delay their entry into the
market, the more likely they are to miss out on gains.

Investing Just Before the Financial Crisis
S&P 500 LSI

S&P 500 DCA

60/40 Stock/Bond LSI*

60/40 Stock/Bond DCA*

205.1
195.6

Of course, long-term averages hide the bumps. What
if an investor were handed a $100,000 check
in June 2008, just as the global financial crisis was
about to break out? Wouldn't it be better to have
done dollar-cost averaging then and captured
the lower prices? Even in 2008, lump-sum investing
would have been the better choice.

158.7

Of course, the stock market doesn't always rebound
strongly from a sell-off. What if stocks bounce back
and forth, but over a long period of time, and essentially
go nowhere? Here things get a little less clear-cut.
Perhaps the most famous example of a stock market
going nowhere was the 1970s. In a U.S. economy
beset by stagflation and high interest rates, equities
struggled throughout the decade. Still, even in
this case, there was enough upward movement that
a fully invested portfolio, whether stock-only or
60/40, outperformed the dollar-cost-averaging strategy,
as the third exhibit shows.
Tom Lauricella is the editor of Morningstar Direct.

150

50
06/2010

06/2012

06/2014

06/2016

Getting In Just After the Financial Crisis Bottom
S&P 500 LSI

S&P 500 DCA

60/40 Stock/Bond LSI*

60/40 Stock/Bond DCA*

Despite the massive haircut in 2008, it isn't hard to
understand the outperformance of the lump-sum
approach. Since hitting bottom in early 2009, the U.S.
stock market has been in an uninterrupted bull market
ever since. And because the bear market happened
early in the time frame, that investor had more time to
recover and had more money in the market at the
bottom than the investor who did dollar-cost averaging.
What about investors who got a windfall in June 2009,
but-shellshocked from the financial crisis meltdown-
dribbled in their money instead of putting it to work all
at once? As the second exhibit shows, they would
have been left far behind by the bull market in stocks.

200

100
06/2008

The first exhibit shows the results from both a stocksonly portfolio and a 60% stock/40% bond balanced
portfolio of the S&P 500 and bonds, as represented by
the intermediate-term U.S. government index from
the Ibbotson Stocks, Bonds, Bills, and Inflation series.

Performance
$250K
239.7

Performance
$400K
368.9

300
250.7
188.1
153.2

200
100
0

06/2009

06/2011

06/2013

06/2015

06/2017

Investing During the 1970s Stock Market Doldrums
S&P 500 LSI

S&P 500 DCA

60/40 Stock/Bond LSI*

60/40 Stock/Bond DCA*

Performance
$200K
189.8
176.8
144.0
142.2

150

100
50
01/1970

01/1972

01/1974

01/1976

01/1978

*A portfolio composed of 60% stocks tracking the S&P 500 and 40% bonds tracking the IA SBBI US IT Govt TR USD.
Source: Morningstar Direct, author's calculations. Data as 10/31/2019.

Morningstar - Q1 2020

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