Two Ways to Invest a Cash Windfall

Jul 26, 2023

When deciding how to add a large amount of cash to your portfolio, consider the pros and cons of dollar-cost averaging and lump-sum investing.

Dan Hunt

Key Takeaways

  • Dollar-cost averaging involves investing your cash in equal installments over a period of time.
  • This contrasts with a lump-sum approach, where you invest your capital all at once into your strategic asset allocation.
  • Lump-sum investing may generate slightly higher annualized returns than dollar-cost averaging as a general rule.
  • However, dollar-cost averaging reduces initial timing risk, which may appeal to investors seeking to minimize potential short-term losses and ‘regret risk’.

If you’ve received a large amount of cash—whether from selling a business or a mature investment, earning a large bonus or even receiving a sizable inheritance—you may be considering investing a portion of it in pursuit of your long-term financial goals. But what’s the right way to put this new capital to work in your portfolio? Should you invest your money all at once or gradually? Should you get started right away or wait until the market looks more favorable?


Given investors’ often visceral aversion to losses, it’s easy to become paralyzed by decisions over exactly how and when to invest. That may be especially true in today’s uncertain market environment. Buoyed by the prospect of Federal Reserve interest-rate cuts and excitement about advances in artificial intelligence, U.S. stocks have enjoyed solid gains in 2023, recouping much of their deep losses from 2022 and tempting many investors to join in the rally. However, Morgan Stanley’s strategists see economic headwinds and slowing corporate-earnings growth ahead, which could very well spark renewed volatility.  


In such circumstances, it may make more sense than usual to consider dollar-cost averaging as an alternative to lump-sum investing. Here’s a look at the pros and cons of each. 

With dollar-cost averaging, you methodically invest your cash in equal amounts over a period of time.

Dollar-cost averaging

With dollar-cost averaging, you methodically invest your cash in equal amounts over a period of time—for example, investing $120,000 in $10,000 monthly installments over 12 months.


Pros: Contributing to your portfolio in a series of smaller amounts is a good way to ease yourself into the market, particularly if you’re cautious about the market outlook. Since investments are made over time at various prices per share, the approach reduces the sensitivity of your portfolio’s return to a single trade date, potentially making it easier for you to ride out the market’s ups and downs. For example, if you invest the first of several installments right before share prices drop sharply, you will have incurred an unrealized loss only on the portion invested thus far, not the entire amount you intend to invest. This approach may help you commit to a strategy even if the initial returns are poor. During periods of market volatility, it may also help you feel less compelled to alter your underlying strategy for achieving your long-term goals.


Cons: By only investing small amounts of capital at a time, you might end up missing out on positive returns in a rising market.

With lump-sum investing, you invest all at once into a diversified portfolio.

Lump-sum investing

With lump-sum investing, you invest all at once into a diversified portfolio.


Pros: This approach lets you deploy your capital right away, which often proves advantageous over longer periods. In an analysis of more than 1,000 overlapping, historical seven-year periods1, Morgan Stanley Wealth Management’s Global Investment Office found that lump-sum investing generated slightly higher annualized returns than dollar-cost averaging in more than 55% of cases. For example, in an “aggressive” portfolio with high allocations to stocks, the lump-sum approach would have yielded a 0.41% higher return than dollar-cost averaging over 12 months.


The same general findings held true when we ran more than 10,000 forward-looking hypothetical simulations using the two approaches, with lump-sum investing becoming increasingly attractive relative to dollar-cost averaging the more the portfolio’s expected returns exceeded those of cash.


Cons: Short-term market movements are unpredictable. If you put all of your money into the market at once during a volatile stretch—for example, at the start of a correction or a bear market—you could experience significant losses that could take years to recoup. That can hurt psychologically as much as financially, as many people take the wrong lessons from experiencing significant losses and compound the financial setback by underinvesting in markets relative to what they need for their financial goals.


Determine the Right Approach

While both approaches have pros and cons, keeping all your money on the sidelines for fear of getting it wrong may be the least advisable approach, because it places too little emphasis on giving your savings a chance to potentially grow. Rather than overthinking your timing and approach for entering the market, it’s typically best to commit to an investment plan that can help you achieve your financial goals and build your wealth over time—whether that involves lump-sum investing or dollar-cost averaging. Your Morgan Stanley Financial Advisor can help you develop a goals-based strategy and assess current risks and opportunities in the markets to help you decide the right approach for you.

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