RBS 116: Lump Sum Investing vs Dollar Cost Averaging When Stocks Are Expensive

Lump sum investing consistently outperforms dollar cost averaging about two-thirds of the time, regardless of market valuation. While dollar cost averaging serves as a risk-mitigation strategy, historical data—including studies from Vanguard and analysis by Nick of "Dollars and Data"—demonstrates that delaying investment often results in lower long-term returns. However, when the cyclically adjusted price-to-earnings (CAPE) ratio exceeds 30, dollar cost averaging may provide a statistical advantage. For retirees, valuation-based asset allocation—adjusting equity exposure based on market richness—can potentially increase safe withdrawal rates beyond the traditional 4% rule. Despite these findings, maintaining a consistent asset allocation plan remains a more reliable strategy for most investors than attempting to time the market based on valuation metrics.