Comparing Investment Strategies: Lump Sum, Dollar Cost Averaging, and Value Cost Averaging And for all of you asking questions on this topic ask here the listen to next Sundays podcast and they will be answered 1. Lump Sum Investing You invest $12,000 all at once when the stock price is $120 per share, purchasing 100 shares.
After one year, if the price remains $120, your investment is still worth $12,000—you break even. 2. Dollar Cost Averaging (DCA) Instead of investing all at once, you invest $1,000 per month over 12 months, buying shares at different prices: * Month 1: $120 per share → Buy 8.33 shares * Month 2: $100 per share → Buy 10 shares * Month 3: $90 per share → Buy 11.1 * Month 4: $100 per share → Buy 10 shares * Month 5: $100 per share → Buy 10 shares * Month 6–12: Stock stabilizes at $120, so each $1,000 buys 8.33 shares per month for a seven month total of 58.31 shares At the end of the year, you have 107.74 shares, valued at $12,928.20, a modest gain compared to lump sum investing. 3. Value Cost Averaging (VCA) With VCA, instead of investing a fixed amount each month, you adjust your investment to maintain a target portfolio value. * Month 1: Stock is $120 → Target portfolio value is $1,000 → Buy 8.33 shares. * Month 2: Stock drops to $100 → Portfolio is worth $833. To reach the $2,000 target, invest $1,166.67, buying 11.67 shares. (Total: 20 shares). * Month 3: Stock drops to $90 → Portfolio is worth $1,800. To reach $3,000, invest $1,200, buying 13.33 shares(Total: 33.33 shares). * Month 4: Stock rises to $100 → Portfolio is $3,333.33. To reach $4,000, invest $667, buying 6.67 shares (Total: 40 shares). * Month 5: Stock remains at $100 → Invest $1,000, buying 10 shares (Total: 50 shares). * Month 6–12: Stock rises to $120 → Invest $1,000 per month, buying 8.33 shares each month for 7 months for a total of 58.31 shares By year-end, you own 108.31 shares, worth $12,997.20 at the final price of $120. Final Comparison of Strategies Lump Sum 100 shares at $120 a share == $12,000 Dollar Cost Averaging (DCA) 107.74 shares at $120 a share = $12928.80 Value Cost Averaging (VCA) 108.31 shares at $120 a share ==$12,997.20 A $997 gain compared to lump sum A $68.40 gain compared to DCA In this example the gain is small but you always want your money to make more money and any gain is a gain and never forget that compounding will also come into play Key Takeaways * Lump Sum Investing performs best if the stock price consistently rises. * Dollar Cost Averaging (DCA) slightly improves returns and lowers risk if the stock fluctuates. * Value Cost Averaging (VCA) tends to yield the highest returns because it buys more shares when prices drop and invests less when prices rise.

Posted by Suze at 2025-02-09 10:14:00 UTC