Some times people get very lucky and have an unexpected windfall of cash that landed into their possession. Generally people want to make smart decisions with their money, so they often consider investing it. Some of these people often choose not to invest it all at once so that they can make use of dollar cost averaging, which decreases the risk of the overall investment as time goes on. Which should these people do, invest it all in the market now, or invest it slowly over time? The answer is that if you have a large sump of money that you aren’t going to need right away and just want to invest it, you should just as well put it all in the market now.
First, let’s look at the historical rates of return for the stock market. We know that capitalism trends upward and that over a long period of time, there’s a pretty good chance that our money is going to make more money should we invest it well. We know that since its inception, the S P; 500 has had a very decent rate of return, which is around 12%. This means for every one month that you invest all of your money in the stock market you will get an additional 1% on your money. If your money is sitting in a money market account somewhere, you’ll be lucky to earn maybe .3% of that money per month. The stock market has a much better historical rate of return, so that’s where you should put your money. Another great platform to put your money is in the foreign exchange. This is one of the common and easiest ways. If you are not into stocks, you may want to try Forex and see if you can grow your money by exchanging dollar in euro.
The defendants of dollar cost averaging will quickly retort and ask us, “But what if it goes down right away?” Yes, that is entirely possible and those things do happen, but over a long period of time, you’ll still make a whole bunch of money. The volatility of your investments going up and down will average out over a long period of time to do very well. You might get the benefits of dollar cost averaging if the investment goes down, but you might also pay more for stock if the value of the stock goes up. The truth is that none of us really have a good idea of where mutual funds are going to go in the next five years, so there’s no use trying to guess.
There could possibly be some benefits of dollar cost averaging if you get lucky, but it’s just not worth messing with. We do know that historical the S P; 500 has given a rate of return of 12%, which is a very good investment. Over a long period of time, lump sum investing is definitely the way to go if you have the money to invest.
