Averaging versus lump sum: compare identical cash on two price paths
Calculate waiting-cash exposure and losses when 300 units are deployed immediately or in three installments.
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Compare when to deploy an already available sum
Lump-sum investing deploys available capital immediately; dollar-cost averaging invests equal amounts on set dates. Equal amounts buy more units at lower prices, but later purchases can also be at higher prices. The average cost is not necessarily below the first lump-sum purchase price. Separate future paycheck contributions from holding back cash already available today. FINRA's explanation makes this distinction and discusses costs from more transactions.
Match starting cash, dates and terminal prices
Illustrative paths: starting cash is 300 units, cash earns 0%, there are no fees, taxes or dividends, and fractional units are available. Lump sum invests 300 on day 1. Averaging invests 100 on days 1, 31 and 61. Both are valued immediately after the last purchase on day 61.
On a rising path of 10 → 12 → 15, lump sum owns 30 units worth 450. Averaging buys 10 + 8.3333 + 6.6667 = 25 units worth 375, at an average cost of 300/25 = 12. On a falling path of 10 → 8 → 5, lump sum owns 30 units worth 150. Averaging buys 10 + 12.5 + 20 = 42.5 units worth 212.50, at an average cost of about 7.0588. Averaging wins the falling-path comparison yet still loses 87.50 of the initial 300. This compares ending wealth, not maximum drawdown.
A study frequency is not a future probability guarantee
Finlay and Zorn's Vanguard research reports lump-sum outperformance in many historical and simulated comparisons. Its historical equity comparison, for example, uses three monthly purchases and valuation after one year. Do not turn that frequency into a guaranteed probability for a purchase today. Actual interest on waiting cash and extra transaction costs also change our illustrative comparison.
Before choosing, write down available capital, emergency reserves, deployment dates, cash yield and costs. If averaging aims to build initial exposure gradually, recognize that once deployment is complete the entire invested amount is exposed to market losses. Neither forced panic selling nor a universal numerical loss-aversion coefficient is assumed.