Your money plan · Step 5

Step 5: Investing strategies — DCA, lump sum, buy the dip and more

Your emergency fund is full, your budget works and expensive debt is gone. Now the money you won't need for years can start growing. But how should you put it into the market — all at once, a little every month, or waiting for a crash? Here are the main strategies, how they work, and their honest pros and cons.

👴 In one sentence Invest regularly in cheap, diversified funds, for a long time, and don't try to guess what the market will do next month.

Before you invest: the checklist

✅ Emergency fund of 3–6 months is in place (step 1).
✅ No high-interest debt — credit cards, overdrafts (step 4).
✅ The money is for goals 5 years or more away. Shares can fall 30–50% in a bad year and take years to recover.
✅ You know what you're buying. For most people that's a low-cost, diversified index fund or ETF (see funds & risk), rather than a handful of individual shares.

1. Dollar-cost averaging (DCA)

You invest the same amount at regular intervals — say $300 on the 1st of every month — whatever the price. When prices are low, your $300 buys more units; when prices are high, fewer.

DCA in a falling-then-recovering market $300 a month into a fund

Month 1 · price $1030.0 units

$300 ÷ $10.

Month 2 · price $837.5 units

The market fell — the same $300 buys more.

Month 3 · price $560.0 units

A crash. Scary on the news, but DCA automatically buys twice as many units as in month 1.

Month 4 · price $837.5 units

Recovery begins.

Month 5 · price $1030.0 units

Back where it started.

Invested $1,500 → units bought195.0

Worth 195 × $10 = $1,950: a 30% gain, although the price ended exactly where it began.

Average cost per unit = 1,500 ÷ 195$7.69

Lower than the average price ($8.20), because more units were bought when cheap. Investing $1,500 at once in month 1 would have bought 150 units, worth just $1,500.

But markets rise more often than they fall. If the price had instead climbed steadily $10 → $11 → $12 → $13 → $14, DCA would have bought 126.8 units, worth $1,775, while $1,500 invested at once in month 1 would be worth $2,100. That's the trade-off of the next strategy.

👍 Pros

Automatic and simple; fits a monthly salary perfectly; removes the stress of "is now a good time?"; buys more when prices are low; makes crashes easier to live through.

👎 Cons

If you already have a lump sum, holding part of it in cash usually costs returns in a rising market; more transactions can mean more fees with some brokers.

💡 You're probably already doing DCA If you invest part of every pay cheque — or contribute to a workplace pension — you are dollar-cost averaging. For money that arrives monthly, it isn't a choice: it's simply investing as soon as you can.

2. Lump sum investing

You have a large amount at once (an inheritance, a bonus, the sale of a house) and invest all of it immediately.

Because markets have risen in most years, money invested sooner has usually had more time to grow. A well-known Vanguard study (2012, updated since) compared investing a lump sum at once with spreading it over 12 months in the US, UK and Australia: the lump sum came out ahead about two-thirds of the time.

👍 Pros

Historically the higher expected return; all the money is working from day one; one decision, then done.

👎 Cons

Painful if a crash comes right after — a third of the time it does worse; the fear of that regret makes many people never invest at all.

💡 A practical middle way If investing a large sum at once would keep you awake at night, spread it over 3–12 months with a fixed schedule written down in advance. Slightly lower expected return, much lower regret — and far better than leaving it in cash for years "waiting for the right moment".

3. Buy the dip

You keep cash on the side and invest only after the market has fallen — say 10% or 20% from its peak.

It sounds clever: who doesn't want to buy at a discount? The problem is the waiting. Markets can rise for years without a big dip, and your cash earns little meanwhile. Writer Nick Maggiulli tested an extreme version — an investor who magically bought at the exact bottom of every dip — against simple monthly DCA over 40-year periods of US market history. Even with perfect foresight, buying the dip lost to DCA in about 70% of the periods. Real investors, who can't see the bottom, usually do worse.

👍 Pros

Feels good — you buy at lower prices; can work in long, choppy, sideways markets; having some cash ready in a crash can be psychologically useful.

👎 Cons

Cash sits idle while the market climbs; dips you wait for may start from higher prices than today's; when a real crash comes, fear often stops people from buying anyway.

4. Market timing (selling before crashes)

Selling when you think the market will fall and buying back when you think it will rise. It needs to be right twice — when to get out, and when to get back in.

The best days in the market often come right after the worst ones, in the middle of the panic. Studies such as J.P. Morgan's annual retirement guide regularly show that missing just the 10 best days over a 20-year period cuts the final result roughly in half — and many of those best days happened within two weeks of the worst ones.

👍 Pros

In theory, avoids large losses. Occasionally someone gets it right — and becomes famous for it.

👎 Cons

Very few professionals succeed consistently; missing the rebound is costly; frequent trading adds fees and taxes; stressful.

5. Value averaging

A variant of DCA: instead of investing a fixed amount, you aim for your portfolio to grow by a fixed amount — say $300 a month. If the market fell and your portfolio is short of the target, you invest more; if it rose and you're ahead, you invest less (or even sell a little).

👍 Pros

Buys even more when prices are low and less when high; a disciplined, rule-based system.

👎 Cons

Needs extra cash precisely when markets crash (often when jobs are less safe); more work each month; selling can trigger taxes.

6. Buy and hold, with rebalancing

Choose a mix — for example 80% in a global share index fund and 20% in bonds — buy it, and keep it for decades. Once a year, rebalance: if shares have risen to 88%, sell some and buy bonds to return to 80/20. Rebalancing automatically "sells high and buys low" and keeps your risk at the level you chose. It combines naturally with DCA: just direct each month's new money to whatever is below its target.

👍 Pros

Low cost, low effort, low taxes; captures the market's long-term growth; the strategy behind most successful retirement savers.

👎 Cons

Requires sitting through crashes of 30–50% without selling; boring — which tempts people to tinker.

7. Picking individual stocks

Choosing companies yourself using the skills from the rest of this course: ratios, multiples and a DCF. It's fascinating — and hard. Every year, S&P's SPIVA reports find that most professional fund managers fail to beat their index over 10–15 years, after fees.

👍 Pros

You learn a lot; you own businesses you understand; a chance to beat the market if you're skilled and patient.

👎 Cons

Concentrated risk — one bad company hurts; time-consuming; most people, including professionals, end up below the index.

💡 Core and satellite Many investors keep a core of 80–90% in index funds and a small satellite (10–20%) for their own stock picks. You can learn and have fun without betting your retirement on it.

All strategies side by side

Strategy	Best for	Effort	Main risk
DCA	Investing from your monthly salary	Very low	Few — slightly lower return than lump sum when you already have the cash
Lump sum	A large sum you already have	Very low	Investing just before a crash, and the regret that follows
Buy the dip	Small extra amounts on top of DCA, if at all	Medium	Cash waiting on the side while prices rise
Market timing	Almost nobody	High	Missing the best days of the rebound
Value averaging	Disciplined investors with spare cash	Medium	Needing lots of cash in a crash
Buy & hold + rebalance	Long-term savers, retirement	Low	Selling in panic during a crash
Stock picking	Enthusiasts, as a small part of the portfolio	High	Concentration and underperforming the index

Sam's investing plan

Sam has reached the full $5,550 emergency fund and the credit cards are gone. The plan:

Sam's monthly investing in $

Automatic transfer on payday500

Pay yourself first (step 3) + DCA: the money is invested before Sam can spend it.

Global share index ETF (80%)400

Thousands of companies in dozens of countries, for a fee of around 0.2% a year.

Bond fund (20%)100

Cushions the falls. Rebalanced back to 80/20 once a year.

After 10 years at 7% a year~86,500

$60,000 paid in; the rest is growth. 7% is an assumption for illustration, not a promise — real returns go up and down.

After 30 years at 7% a year~610,000

Only $180,000 paid in. Over long periods, compounding does most of the work. Try your own numbers in the compound interest calculator.

⚠️ The biggest risk is you Most investors lose money not because of the strategy they picked, but because they abandon it — selling in a panic after a fall, or chasing whatever went up last year. Write your plan down, automate it, and look at your portfolio rarely. A boring plan you stick to beats a brilliant one you don't.

✏️ Check yourself: Sam inherits $20,000. The emergency fund is full and there's no expensive debt. A friend says: "Wait — the market is bound to crash soon, then buy the dip." What would you suggest?

Show the answer

History favours investing it now: a lump sum has beaten spreading it out about two-thirds of the time, and waiting for a dip has usually done worse than both — nobody knows when the crash will come, or from what level. If investing $20,000 in one day feels too stressful, a fixed schedule — for example $5,000 a month for four months — is a reasonable compromise. The worst option is the friend's: cash on the side, waiting indefinitely.