Q: When people compare investing a lump sum to dollar cost averaging to market timing they usually trot out long term averages showing lump sum is better. Doesn’t context matter? Valuations are currently elevated. If they ran the comparisons after eliminating the years when valuations were at or below some long term average would the answer change?
How would you approach this question in today’s market context.
Appreciate you get a version of this question regularly but I’d like your answer for today. Thanks!
How would you approach this question in today’s market context.
Appreciate you get a version of this question regularly but I’d like your answer for today. Thanks!
5i Research Answer:
Part of the surprising point of the lump sum excercise is that valuations don't really matter in this context. The studies we have seen typically are done over rolling periods to reflect all types of markets. Now in fairness, of course if one could time a top or bottom and lump sum invest this way, it would improve returns but the point is that this is easier said than done. In the current context, if one were worried about market valuations, they 'could' still go up 20% from here, then drop back down to todays levels when one might decide to invest (taking advantage of the 'pullback'). But over that period they missed out on dividends and income as well, and that assumes they actually time it properly as well.