The S&P 500 (SNPINDEX:^GSPC) set its latest record close, 7,818.93, on Oct. 6. As of this writing, it’s just a little over 1% under that mark. For anyone with a lot of cash meant for an index fund, putting it all in so close to a record can seem like asking for bad timing.
The common alternative is dollar-cost averaging, which here means splitting the money into equal chunks and buying over several months. Vanguard tested the two methods in a 2012 study and found investing all at once did better around two-thirds of the time.
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I ran a simpler check of my own going back to 1950 and got a similar result. So I’d lean toward putting most of the money in right away. But spreading purchases out still has a use, and it shows up in the bad years.
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What Vanguard found
Vanguard’s study, called “Dollar-cost averaging just means taking risk later,” compared both approaches over rolling 10-year spans in the U.S., the U.K., and Australia. The U.S. data covered 1926 through 2011, and the two other markets had shorter histories. In the main version, the waiting money was in cash investments and went into a mix of 60% stocks and 40% bonds over 12 months. Investing all at once won 67% of the U.S. periods, and the U.K. and Australia were at 67% and 66%. On average, the lump sum ended around 2.3% ahead in the U.S.
And the longer the money was spread out, the worse it did. Versus a 36-month plan, the lump sum won around 90% of the U.S. periods. The main reason is stocks and bonds have earned more than cash over time, so waiting money tends to buy in at higher prices.
Of course, the study was about a sum already on hand. Vanguard sees investing a piece of every paycheck as a separate case, since that money only comes a little at a time.
What about buying near a record?
Vanguard’s main test mixed stocks and bonds, so I ran a stock-only version on the S&P 500. Using month-end closes since 1950, I compared investing a sum all at once to 12 equal monthly purchases. I valued each a year after the first buy, on price alone (without dividends), with the waiting cash earning zero.
Buying all at once won in 651 of the 909 rolling 12-month stretches, or around 72% of the time.
After all, the index itself gained in about three out of four of those stretches. Over the long run, stock prices have tended to follow company earnings higher.
