When it comes to investing, timing can make all the difference. Should you invest all at once, spread your contributions evenly over time, or adjust your investments based on market performance?
On a recent episode of her “Women & Money” podcast, Suze Orman broke down three common investment strategies: lump-sum investing, dollar-cost averaging, and value-cost averaging. While each method has its merits, Orman shared insights into how they compare and which one might be best for long-term investors.
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Lump-Sum Investing: All In at Once
Lump-sum investing is the simplest of the three strategies. You take a large amount of money and invest it all at once. Orman explained this with an example: if you invest $12,000 into an exchange-traded fund priced at $120 per share on Jan. 1, you'll buy 100 shares. No further action is required, and the investment fluctuates with the market.
By the end of the year, if the ETF remains at $120 per share, your investment is still worth $12,000. The risk with lump-sum investing is that if the market drops right after you invest, your portfolio could take a hit. However, if the market trends upward, you benefit from having all your money working for you from the start.
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Dollar-Cost Averaging: Investing Consistently Over Time
Dollar-cost averaging involves investing a fixed amount at regular intervals—say, $1,000 per month over 12 months. This approach reduces the risk of investing everything at a market peak. When prices are low, you buy more shares; when prices are high, you buy fewer.
Using the same $12,000 example, Orman illustrated how this method can result in owning more shares by the end of the year. In the first month, that $1,000 would get 8.33 shares of that stock or ETF at $120 a share. If the stock goes down to $90 a share the second month, you're still investing $1,000, but you would pick up 11.1 shares.
Orman continues the example with fluctuating stock prices between $90 and $120 each month. In her example, $1,000 per month could result in 107.74 shares instead of 100. At the end of the year, with the ETF at $120 per share, the investment is worth $12,928—higher than the lump-sum approach.
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Value-Cost Averaging: Adjusting Contributions for Growth
Value-cost averaging is a more dynamic strategy that adjusts monthly investments to maintain a target portfolio value. Instead of investing a fixed amount each month, an investor contributes just enough to reach an increasing target value (e.g., $1,000 in month one, $2,000 in month two, and so on).
This method requires more calculations, but Orman highlighted its potential benefits. In her example, value-cost averaging resulted in owning 108.31 shares—slightly more than dollar-cost averaging. At the end of the year, the same example portfolio would be worth $12,997, surpassing both lump-sum investing and dollar-cost averaging.
Which Strategy Does Suze Orman Prefer?
Orman has long advocated for dollar-cost averaging, and her breakdown reinforced why it's a solid strategy for most investors. While value-cost averaging produced slightly higher returns in her example, the difference was minimal—just $68.40 more than dollar-cost averaging. Orman noted that value-cost averaging can be complex and requires adjustments each month, making it less practical for many investors.
Ultimately, the best strategy depends on an investor's risk tolerance and ability to manage investments. Lump-sum investing works well if the market is rising, but dollar-cost averaging provides a smoother experience and mitigates risk. For those willing to put in extra effort, value-cost averaging could yield higher returns over time, and Orman did say that one is her new favorite.
Orman's takeaway? More is always better than less—but consistency in investing remains key.
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