A landmark study by Peter Bacon and Richard Williams, professors at Wright State University, suggested that investing a lump sum all at once as soon as it is received reaps greater financial rewards than DCA, albeit at a higher level of risk.
The study tracked lump-sum vs. systematic investments over 780 different 12-month periods from 1926 through 1991. Results indicated that an investor would have fared better 64.5% of the time by investing his or her money in a lump sum. This implies that if you have a large sum of money earmarked for the stock market, it should be put to work as soon as possible. Though past performance does not guarantee future results, stocks have historically risen the most over time.
Remember, however, that markets change over time, and this study may have yielded different results in more recent years. And, while you evaluate the relevance of the study to your investing needs, also consider the following situation: If you're 65 years old and you receive a $300,000 401(k) distribution, can you afford to take a chance that the market will drop shortly after you invest your retirement proceeds? If there's a sustained market decline, two years thereafter you might discover that your $300,000 life savings would be worth only $200,000. Over time you might recover your investment, but you have to weigh the consequences of loss before choosing lump sum vs. DCA.
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