Dollar-Cost Averaging vs Lump Sum: What a Real 20-Year Test Actually Found
6 min read
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6 min read
Say you just got Rp 100 juta from a bonus, an inheritance, or selling something. Do you put it all into the market today, or split it into smaller chunks over the next several months? This is the dollar-cost averaging vs lump sum question, and most people answer it on gut feeling instead of looking at what actually happens when you run the two approaches side by side.
Lump sum investing means putting the entire amount in on day one. Dollar-cost averaging (DCA) means splitting it into equal pieces and investing a bit at a time, on a fixed schedule, regardless of what the price is doing. One real test, run over 20 straight years, shows which one actually came out ahead, and by how much.
Charles Schwab's Center for Financial Research ran an experiment that answers this better than a hypothetical ever could. They gave five hypothetical investors the exact same amount, $2,000, at the start of every year from 2005 through 2024, a real 20-year stretch of the actual S&P 500 index. The only thing that differed between them was when they put that $2,000 to work.
| Investor | What they did | Ending balance after 20 years |
|---|---|---|
| Peter Perfect | Somehow bought at the year's single lowest price, every year | $186,077 |
| Ashley Action | Lump sum: invested the full $2,000 on day one of every year | $170,555 |
| Matthew Monthly | Dollar-cost averaging: split the $2,000 into 12 equal monthly buys | $166,591 |
| Rosie Rotten | Somehow bought at the year's single highest price, every year | $151,343 |
| Larry Linger | Never invested at all. Left the cash in T-bills every year | $47,357 |
Every one of them put in the same $40,000 total over 20 years. Only the timing differed. (Source: Charles Schwab Center for Financial Research, "Does Market Timing Work?", data through 2024.)
Look at Ashley Action against Matthew Monthly. Ashley, who invested her full $2,000 the moment she got it each year, ended up with $170,555. Matthew, who spread the same amount out over 12 monthly buys, ended up with $166,591. That is a gap of about $3,964, roughly 2.4% more for going all in immediately.
This is not a one-off result either. Schwab tested this same setup across 80 separate rolling 20-year periods going back decades, and in 70 of them, the ranking held in the exact same order: lump sum ahead of dollar-cost averaging, ahead of sitting in cash.
Vanguard reached a similar conclusion from a completely separate study. Testing 1,021 rolling 12-month periods across US, UK, and Australian markets from 1926 to 2015, Vanguard found lump sum investing beat dollar-cost averaging roughly two-thirds of the time, with the exact win rate varying by market from about 62% to 74%. For a typical balanced 60% stock, 40% bond portfolio, lump sum's average edge over a 12-month DCA period was about 2.3 percentage points, similar in size to what Schwab's real 20-year test found. Stretch the DCA period out to 36 months instead of 12, and Vanguard found lump sum's win rate climbs to about 90%.
Time in the market compounding > time spent waiting to invest the rest
The reason is simple once you see it: markets go up more often than they go down over any given year. Every month you hold cash back and wait to "average in" is a month that money was not compounding at all. Dollar-cost averaging is, in effect, a bet that prices will fall enough during your waiting period to make up for that lost time. Most of the time, in the historical record, that bet does not pay off.
Here is the number worth remembering more than any of the above. Look again at Larry Linger, who never invested a cent and just sat on cash. He ended the same 20 years with $47,357.
Compare that to Matthew Monthly, who used dollar-cost averaging, the more "cautious" of the two real strategies: $166,591. That is a gap of over $119,000, more than three and a half times what Larry ended up with.
Even Rosie Rotten, who somehow managed to buy at the single worst possible day of every single year for 20 years straight, a genuinely terrible run of luck, still ended with $151,343, more than triple Larry's cash pile.
None of this means dollar-cost averaging is a mistake. It is the right approach in two common situations:
None of these numbers guarantee what happens with your own money over your own next 20 years. Twenty-year windows differ, and a run of bad luck right after a lump sum investment is a real risk, even if the odds favor it working out. All five hypothetical investors above tracked the S&P 500, the same US index behind funds like the SPDR S&P 500 ETF Trust that are available to Indonesian investors today.
If you are deciding how to put a lump sum to work, check your Portfolio Health view on your NetWort dashboard first. See how your current mix would have handled a similar-sized swing, and decide whether you can hold steady through one before committing it all at once.
This sits alongside a related lesson worth knowing before you invest any lump sum: a portfolio's average annual return and its actual compounded result can tell two very different stories, especially the more volatile the ride gets.