Best Way To Buy The Stock Market Dip: Dollar Cost Averaging Or Going All-In?

The SPDR S&P 500 ETF Trust SPY is off to a shaky start to September, and history suggests the second half of the month could be weak as well.

Long-term investors who have cash in their accounts are likely asking themselves the age-old Wall Street question: should I go all-in on the dip or dollar cost average into a position as the S&P 500 falls?

Callie Cox, senior investment strategist at Ally Invest, recently discussed this debate over which is the best approach to establishing or adding to a long position in the market.

Related Link: Key S&P 500 Levels To Watch As Market Endures 4th Straight Day Of Losses

What Is Dollar Cost Averaging: Dollar cost averaging involves determining how large of a position you want to take in a stock or ETF and then dividing that total position size into smaller increments and purchasing your full position in chunks over time rather than investing a lump sum all at once.

To test dollar cost averaging as a strategy compared to investing a lump sum, Cox compared two different approaches to investing in the S&P 500 since 1950.

The first approach involves putting $10,000 into the market immediately and then adding another $10,000 every 100 months, or about 8.5 years. The other strategy involves investing $100 on the first day of every month for 100 months. In theory, investors are investing the same principle into the market either way.

And The Winner Is: Cox found the lump-sum approach has outperformed the dollar cost averaging approach during 85% of all 100-month periods since 1950.

“In a market that has generally gone up more than it’s gone down over the years, it’s ideal to invest as early as possible. That’s especially true the longer you invest,” Cox said.

Cox said one of the biggest challenges to lump sum investing is the psychology of the market. When you invest all your cash at once, all of your risk is tied to the day you invest rather than being spread out over an extended period of time. If you don’t go all in all at once, you likely won’t stress over when to buy and how much the market moves up or down at any given day.

Still, the data suggests lump-sum investing is the smartest approach to the market over time, unless you are one of the few skilled traders who can consistently identify those small windows in which dollar cost averaging has outperformed 15% of the time.

Benzinga’s Take: If you expect the stock market to rise over an extended period of time, you always want to get as much money in the market as early as possible to maximize your returns.

Any cash you leave on the sideline as part of a dollar cost averaging strategy is weighing down your overall returns unless the stock market consistently trends lower following your first buy-in date.