Lump-Sum vs. Cost Averaging: How to Invest a Windfall Wisely
If you’ve come into a cash windfall—through a bonus, inheritance, or business exit—you’re likely wondering: should I invest it all at once or gradually over time?
Vanguard’s historical analysis of market data offers insight into this very question—and the results are clear.
What the Data Says: Historical Evidence
Vanguard studied returns from the MSCI World Index between 1976 and 2022, comparing:
Lump-Sum Investing (LS): Investing the full amount immediately
Cost Averaging (CA): Splitting the investment into three equal parts over three months
Key Findings:
Lump-sum investing outperformed cost averaging in ~68% of scenarios
Cost averaging still beat staying in cash 69% of the time
Lump sum outperformed cash in 70% of scenarios
Why Does Lump Sum Win More Often?
The advantage comes down to time in the market. Historically, markets have tended to rise over the long term. By investing all at once, your money benefits from compounding and market growth sooner.
When Lump-Sum Investing Tends to Win
More time in the market = greater compounding potential
Strong performance in rising or bull markets
Reduces the opportunity cost of holding cash, which typically underperforms stocks and bonds
When Cost Averaging Might Be Better
While lump sum often delivers higher average returns, it isn’t for everyone.
Cost averaging can be more suitable if:
You’re risk-averse or emotionally sensitive to losses
You're worried about investing just before a downturn
You value peace of mind and behavioural consistency
Important Note:
Cost averaging in this context refers to deliberately phasing a lump sum, not regular investing from income (e.g. monthly pension contributions). Vanguard’s study focused on this systematic windfall investing, not ongoing DCA.
Behavioural Considerations Matter
The best investment strategy isn’t just about returns—it’s about what you can stick to.
Cost averaging may lead to lower average returns, but if it helps you avoid panic selling, regret, or decision paralysis, it can lead to a better long-term outcome.
Automated investing (monthly contributions) remains the most effective long-term wealth-building strategy for most people, even outside the windfall context.
Our Guidance
For most investors, lump-sum investing tends to be optimal over the long term due to greater exposure to market growth and compounding.
If you're worried about short-term volatility, cost averaging can help smooth the experience and reduce emotional mistakes.
Leaving money in cash, especially for extended periods, may feel safe—but it usually leads to lost growth and purchasing power due to inflation.
Final Thoughts: Make Your Strategy Work for You
Lump-sum investing is statistically more effective for long-term growth—but personal comfort and risk tolerance matter just as much.
Choose lump sum if you're focused on maximising returns and can stomach some short-term dips.
Choose cost averaging if it helps you avoid fear-based decisions and keeps you on track.
What’s risky is doing nothing—sitting in cash while inflation quietly eats away at your money’s real value.
Get Tailored Investment Advice from Financial Health
Every investor is different. Whether you’ve received a windfall or are building wealth over time, our financial planners can help you:
✅ Develop a personalised investment strategy
✅ Balance returns with emotional confidence
✅ Stay on track for long-term success