Lump sum is the focus of this guide. When a large sum arrives at once, such as a bonus, an inheritance or the proceeds of a sale, there are two natural choices: invest it all now, or invest it in installments. A February 2023 Vanguard paper tested both, and it also gives a clear answer for people who want installments: keep them short, such as three months. This post walks through what the paper found, shows the numbers, and turns them into a simple plan.
What Vanguard Compared
The paper compares investing a lump sum right away with cost averaging, using a three-month split as its base case: three equal parts invested one month apart. It also looked at four- to six-month splits and did not report a 12-month schedule. The global analysis uses the MSCI World index for 1976 through 2022, and additional markets include the U.S., U.K., Canada, Europe, Australia and emerging markets, each with shorter date ranges. The paper also ran 10,000 simulated return scenarios as a forward-looking check (Vanguard).
How Often the Lump Sum Won
| Schedule | Global lump-sum win rate |
|---|---|
| 3 months | 67.7% |
| 4 months | 69.7% |
| 5 months | 71.7% |
| 6 months | 72.6% |
For a three-month split, the lump-sum win rate across markets ranged from 61.6% in emerging markets to 68.1% in the U.K. For a six-month split, it ranged from 61.8% to 73.7%. Longer schedules widen the gap because the money waits longer to be invested (Vanguard).
The paper also reports that cost averaging beat cash 69% of the time, and that stocks outperformed cash 76% of the time over 1976–2022 while bonds did so 68% of the time (Vanguard). In my view, that suggests getting money into the market in some form matters more than the exact schedule.
What It Meant in Dollars
On a $100,000 start, the paper’s one-year medians for a three-month cost-averaging schedule compared with a lump sum were:
| Portfolio | Lump sum | 3-month CA |
|---|---|---|
| 100% equity | $111,940 | $109,580 |
| 60/40 | $109,360 | $107,453 |
| 40/60 | $107,648 | $106,400 |
The median gaps were $2,360 for 100% equity, $1,907 for 60/40 and $1,248 for 40/60, which the paper describes as about 2.2%, 1.8% and 1.2% (Vanguard). In its simulation for a $100,000 start, the three-month schedule ended $504 behind a lump sum after one year, and a six-month schedule ended $1,491 behind (Vanguard). The gap for a three-month schedule is small compared with the amount invested.
The Downside Side of the Story
The lump sum wins at the median and at the 95th percentile, but it loses at the 5th percentile. For 100% equity, the 5th-percentile ending value was $82,947 for a lump sum and $85,906 for cost averaging. The paper says lump-sum investing has a wider range of outcomes, with higher upside and more drawdown in the worst markets, where cost averaging can preserve more wealth (Vanguard). That is the trade in plain terms: a short schedule gives up a little expected return for a smoother worst case.
What It Says About Regret
The paper says cost averaging temporarily lowers portfolio risk, and that investors with high loss aversion may prefer it despite lower expected returns. In its model, an adventurous persona preferred a lump sum, while moderately conservative and very conservative personas preferred cost averaging when loss aversion was included (Vanguard). For investors who still prefer cost averaging, it recommends keeping the period short, such as three months, to limit the opportunity cost, and it warns that holding cash indefinitely hurts long-term outcomes (Vanguard).
Scaling the Paper’s Dollars to a $120,000 Windfall
The paper reports its dollar results per $100,000 started. Multiplying by 1.2 gives a rough $120,000 version of the same medians; this is my proportional scaling, not a figure the paper reports. For 100% equity, the $2,360 median gap becomes $2,360 × 1.2 = $2,832. For 60/40, $1,907 × 1.2 = $2,288.40. For 40/60, $1,248 × 1.2 = $1,497.60 (Vanguard).
The worst-case side scales the same way. For 100% equity, the 5th-percentile ending values were $82,947 for a lump sum and $85,906 for cost averaging, a difference of $85,906 − $82,947 = $2,959 in favor of cost averaging. Scaled to $120,000, that is $2,959 × 1.2 = $3,550.80 (Vanguard). Put side by side: in the typical case the lump sum comes out ahead by about $2,832, and in the rare bad case cost averaging comes out ahead by about $3,551. That is the price and the protection of a three-part plan, and knowing both numbers in advance lets you pick the side you can live with.
A Simple Three-Part Plan
Here is how the base case looks with an assumed $120,000 to invest. Split it into three equal parts of $40,000. Invest the first part now, the second a month later and the third a month after that. The amount is assumed for illustration.
- Choose the dates today. In my suggestion, put the three dates on a calendar or set automatic transfers so no monthly decision is needed.
- Decide where the waiting money sits. The paper’s base case assumes 0% interest on the cash while it waits, and it reports that higher cash interest reduces the lump sum’s advantage (Vanguard).
- Keep to three months. The paper’s evidence for the cost of waiting rises with longer schedules.
- If you feel comfortable, invest it all now. The paper’s default recommendation is to invest a lump sum immediately, especially for investors who are not highly averse to loss.
Where the Waiting Cash Can Sit Safely
While installments wait, the money needs a home. The FDIC says deposit insurance covers $250,000 per depositor, per insured bank, for each account ownership category, and that it does not cover stock investments, bond investments, mutual funds or crypto assets, even when they are bought through an insured bank (FDIC). The $120,000 example is below $250,000, so by simple comparison it fits within the standard limit at one insured bank in a single ownership category; a larger windfall can be split across banks or ownership categories to stay under each limit. Pairing this with the paper’s note that higher cash interest narrows the lump sum’s edge (Vanguard) gives a practical step: put the waiting money in an insured account that pays interest, then move one third on each date.
Two Related Points From the Paper
- Retirement contributions. The paper says front-loading the annual contribution early in the year may raise the median balance over time (Vanguard).
- Small sums. If the lump sum is a small share of your total wealth, the choice matters less (Vanguard).
My Take on Dollar Cost Averaging vs Lump Sum
- In my view, a short schedule is a reasonable way to get started if it helps you actually invest rather than waiting in cash, and three months is the version with the smallest reported cost.
- In my view, scheduling the installment dates in advance removes a recurring decision. That is my suggestion, not a finding of the paper.
- The paper compares a lump sum with cost averaging over the same money. Regular contributions from each paycheck are a different situation, because that money isn’t available earlier.
Sources
- Vanguard: Cost averaging: Invest now or temporarily hold your cash (Feb. 2023)
- FDIC: Understanding Deposit Insurance
This article offers general information and my own opinions, not financial, tax, or legal advice. The figures in worked examples are assumed. Past results do not guarantee future results. Laws, tax rules, and products change and can differ by location, so check current official sources and talk to a qualified professional about your own situation.
Related reading: Investing With a Small Amount of Money: Why “You Need a Windfall to Start” Is Wrong and $200 a Month at 25 Beats $400 a Month at 35. Here’s the Math.