When I was producing the weekly MoneyTrack TV series seen on PBS stations nationally, I had the great honor of spending hours interviewing John Bogle, the legendary founder of Vanguard and the man credited with creating the first index mutual fund available to individual investors. John Bogle was truly the champion of the small investor.
One theme we talked about a lot was which investing strategy gives the greatest number of people the best chance of succeeding over a lifetime. We weren’t talking about which horse to bet on today, or which private equity fund manager might beat the S&P 500 next year. Bogle was interested in something much bigger: What can an ordinary investor do consistently for 20, 30 or 40 years that works? (You can watch our conversation below. You’ll have to excuse the video quality—it’s from 2009!)
One of his great investing lessons summed it up beautifully: “Time is your friend. Impulse is your enemy.” Bogle’s point was to take advantage of time and compounding and resist the temptation to react to whatever the market happens to be doing right now.
The more time I’ve spent hearing from individual investors, the more convinced I’ve become that one of the most brilliant investing strategies ever devised is also one of the simplest.
It’s called dollar-cost averaging, and there’s a pretty good chance you’re already doing it. If money comes out of your paycheck and goes into your 401(k) every two weeks, you’re dollar-cost averaging. You may also be doing it automatically in an IRA or brokerage account. Month after month, year after year, your money goes into the market without requiring you to decide whether today is the right day to invest.
I’ve always believed that’s incredibly powerful. But I’m the first to admit, looking at only the math, dollar-cost averaging isn’t the actual winner.
Why Investing a Lump Sum All at Once Makes More Money
Suppose you have $12,000 in cash ready to invest. You can invest it all now, or phase it in at $1,000 a month for the next year.
For illustration, let’s assume the market earns a smooth 8% over those 12 months. Invest $12,000 on Day 1 and you’d finish with about $12,960. Invest $1,000 a month while the rest waits in cash earning nothing, and you’d end up with roughly $12,500.
Vanguard’s research backs up the principle: lump-sum investing beats gradually phasing available cash into the market roughly two-thirds of the time. From 1976 through 2022, Vanguard found U.S. stocks outperformed cash 76% of the time.
But there’s a crucial distinction. This applies when you already have the $12,000. If you’re earning $1,000 of investable money each month and investing it immediately, you’re putting each new dollar to work as soon as it’s available.
So why am I such a fan of dollar-cost averaging when the math favors investing a lump sum? Because the math behind lump-sum investing assumes we’ll behave ourselves.
But Math Meets Real Life
Instead of $12,000, imagine you’ve inherited $500,000 and invest it all today. Three months later the market falls 25%, and you’re looking at a statement that’s down $125,000.
What are the odds you’ll calmly leave it alone? Let me show you.
DALBAR has studied investor behavior for more than 30 years. In 2024, the S&P 500 returned 25.02%, while DALBAR calculated that the average equity investor earned only 16.54%. That’s an 8.48 percentage-point gap. Investors withdrew money from equity funds throughout the year, with the largest outflows occurring shortly before a major market surge.
That’s the problem dollar-cost averaging is really good at solving.
Dollar Cost Averaging: The Real Advantage Factors in Your Behavior
Think about someone who’s been putting $500 into a 401(k) every two weeks for years. The market drops 25% and, yes, the account balance hurts. But the process doesn’t change. Another contribution goes in, and because stocks are cheaper, it buys more shares.
Dollar-cost averaging turns investing into something that can happen almost invisibly in the background of your life. You don’t have to decide whether this Tuesday is a good Tuesday to buy stocks or wait for the Fed, an election or the next inflation report to tell you it’s safe. If you have 20 or 30 years before you’ll need the money, lower prices mean your new contributions buy more shares.
That’s dollar cost averaging’s enormous psychological edge. It helps you keep doing the one thing long-term investors (and even the pro’s) don’t do well: stay invested.
Of course, automatic investing doesn’t mean you’ll never get anxious or need advice as life changes. This is where a good fee-only fiduciary advisor can make a real difference, helping you build a portfolio you can actually live with and stick with it when the market gets ugly.
Even Vanguard acknowledges this behavioral tradeoff. Its research says gradually investing a lump sum can make sense for highly loss-averse investors who might otherwise leave the money sitting entirely in cash. For that person, the math strategy that comes in second place could produce a better real-life result because it gets them invested and helps them stay there.
Yes, The Tortoise Still Wins
Dollar-cost averaging isn’t magic and it’s not even exciting. It can’t turn a bad investment into a good one or protect your existing portfolio when markets fall. That’s why it belongs inside a broadly diversified, low-cost portfolio appropriate for your goals and time horizon.
Think of the old tortoise and the hare. The hare is jumping around trying to hunt down the next great stock, moving into last year’s winning fund, raising cash because a correction is coming and figuring out when it’s safe to get back in. His problem is that he has to keep being right, as in, every time right.
The tortoise owns a diversified portfolio and just keeps building it.
So yes, if you hand me $500,000 today, tell me you’re comfortable with market risk and ask what history says, I’ll tell you to get the money invested. Lump sum wins the math most of the time.
But give me 30 or 40 years of bull markets, crashes, recessions, recoveries and scary headlines, and I’ll ask a different question: What strategy gives you the best chance of actually successfully staying invested through all of it?
That’s why, after all these years, I keep coming back to dollar-cost averaging. John Bogle had it right. Time is your friend. Impulse is your enemy.
P.S. I had a great conversation recently with Next Gen Personal Finance podcast about retirement risk, fiduciary advice, and a few of my favorite John Bogle stories. Check it out here.