Is Dollar Cost Averaging (DCA) or Lump-Sum Investing (LSI) better? This is a question which always leaves investors wondering and hoping for more clarity. Why? Because most of the academic finance theory as well as historical evidence shows that Lump-Sum Investing is better, but yet financial advisors and investors in general practice some form of Dollar Cost Averaging. Are investors always so sure of their own wisdom and stubborn in the face of data and evidence? Even Warren Buffett, never a follower of academic theories, advises:
By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when “dumb” money acknowledges its limitations, it ceases to be dumb.
Warren Buffett, Shareholders’ Letter 1993
So what do we do? While for most of the time as an investor, the default investment method will be Dollar Cost Averaging, since we may invest monthly or quarterly with the savings from...