The majority of Nokia employees we talk to bring up the difficulties of investing. Uncertainty is a constant in investing. Recent bias makes the current time, whenever that may be, feel more uncertain than ever. The post-pandemic era and modern conflicts presented us with truly unprecedented economic and health-related uncertainty, but stepping back to any point in history there is always a reason that this time is different; this is true in both bull and bear markets. Uncertainty is not necessarily a bad thing - if investing felt certain we would not expect to collect a meaningfully positive risk premium from owning risky assets. For long-term investors, stocks should deliver on their positive expected returns. The concept of hanging on through tough markets to benefit from long-term expected returns is relatively easy for most investors to understand. The tricky part is doing it, and it doesn’t get any trickier than making the decision to invest a lump sum of cash.

 

The nagging uncertainty that comes with investing in the stock market seems to be particularly pronounced when it comes to investing “new money.” New money could be a windfall from selling a home or business, receiving an inheritance, or winning the lottery. Whatever its source, shifting from cash into stocks can be a nerve-racking experience. In the case of new money, it doesn’t help to know that long-term expected returns are positive when you are deciding to invest a large sum at a single point in time. Instead of investing a lump sum all at once, you might choose to enter the market gradually over some pre-determined period. This is commonly referred to as dollar-cost averaging. It seems intuitive that dollar cost averaging would lead to a better average outcome. You are buying more stocks when stocks are down and less when they are up, and you are avoiding the potential timing error of investing right before a crash. As usual, intuition and investment decisions don’t mix.

 

This paper aims to compare dollar-cost averaging (DCA) to lump sum investing (LSI) through time for Nokia employees and retirees. We will examine average historical outcomes, the worst LSI outcomes, historical bear markets, and historically expensive markets. Neither this analysis nor its broad findings are new. A 1979 paper in the Journal of Financial and Quantitative Analysis by George Constantinides, A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy, regards DCA as suboptimal through two propositions.

 

This paper extends the analysis to include a closer look at the distribution of outcomes on average and under special circumstances commonly believed to be suboptimal for LSI.

Many Nokia employees and retirees have told us how difficult it feels to evaluate certain investment strategies. To evaluate DCA as an investment strategy we will compare it to lump sum investing for rolling 10-year investment periods with monthly steps. This means that starting with the first available month we will examine DCA and lump sum investing through the following decade of returns, and then move the start point one month ahead. For most data series in our sample, this results in 485 10-year periods. For Canada, we have 652 periods, and 1013 for the US. We will evaluate a 12-month DCA implementation, which means splitting up a lump sum into 12 equal monthly investments, against a single lump sum investment. The following chart shows an approximate allocation between cash and stocks over the course of a 12-month DCA period for $1,000,000 of starting cash.

 

Figure 1 – Dollar-Cost Averaging Illustration

 

 

Before finalizing any estate plan, it is worth examining how Nokia's employer-sponsored benefits fit into the broader picture. According to publicly available information, Nokia maintains an active defined benefit pension plan, which provides retirement income based on factors such as years of service and compensation history. Nokia does not appear to offer a formal retiree healthcare program, making healthcare coverage planning an important consideration if you retire before age 65. Because the specifics of your pension formula, vesting schedule, and benefit eligibility depend on your individual employment history and plan documents, We encourage you to review your Summary Plan Description (SPD) or speak with Nokia's HR or benefits team for the most current details.

Source: Benjamin Felix, Portfolio Manager, PWL Capital Inc.

 

In our model, the cash will earn interest at the rate of One-Month US Treasury Bills while it is waiting to be invested. The portfolios are 100% invested in stocks when fully implemented. All analysis has been conducted in US dollars using monthly returns for One-Month US Treasury Bills and the six global stock markets listed in Table 1.

 

Table 1 – Stock Market Indexes

 

 

Source: Benjamin Felix, Portfolio Manager, PWL Capital Inc.

 

In order to evaluate LSI relative to DCA, we have chosen to look at the ending performance of an investment after 10 years. First, we evaluated the full data series for each market to understand the average outcomes. We isolated the most extreme bad outcomes for LSI to examine how DCA performed in those periods. Knowing that we cannot predict when LSI will have its worst outcomes, we then compared LSI to DCA during bear markets and when stock prices are high.

The equity risk premium – the premium that stocks are expected to deliver over a risk-free asset – tends to be consistent over long periods of time. Using US stock data going back to 1926 we can observe the nature of the premium.

 

For most markets, and on average across markets, we find that roughly two-thirds of the time LSI beats DCA over 10-year periods in terms of ending assets. The exception is Japan which is unsurprising given its unique long-term stock market outcome; Japan’s equity market has trailed One-Month US Treasury Bills since 1990.

 

Table 2 – LSI vs. DCA for 10-Year Historical Periods

 

 

Data source: Dimensional Returns Web, CRSP, MSCI, S&P Dow Jones Indices, PWL Capital Inc.

 

The basic insight that we draw from this result is that, on average, LSI leads to greater ending wealth than DCA. To quantify the extent to which LSI tends to beat DCA we examined the 10-year annualized performance difference for the full sample. An annualized figure stated as a percentage makes for an easy comparison to familiar items like fees and withholding taxes. On average, DCA is leaving a meaningful amount of expected returns on the table at 0.38% annualized over ten years in the historical data; this should not be a surprise considering that DCA delays exposure to higher expected returning stocks.

 

Table 3 – LSI vs. DCA Annualized 10-Year Performance Difference

 

 

Average historical outcomes may be of limited psychological value when making investment decisions under conditions of uncertainty. An investor doesn’t necessarily care to know about average outcomes – any point in time will never feel average to those living in it. Investors want to minimize their perception of the downside risk associated with investing a large sum of cash in an uncertain market. It is important for Nokia employees to note that this exercise is distinct from examining the percentiles in Table 4. Table 4 demonstrates the distribution of differences in outcomes. That is the magnitude of the average performance difference between LSI and DCA across the full data set.

 

One seemingly obvious case where DCA feels like it should shine is during bear markets - market drops of 20% or more. Stock market volatility tends to cluster; when markets are turbulent, they tend to remain so for some time. Spreading an investment out over 12 months in the face of a bear market seems like a reasonable approach to improving the expected outcome. To be clear, we are assuming that the 20% drop has already happened when we are making the LSI or DCA decision.

 

For this sample, we have defined a bear market as a monthly drop of 20% or more from the previous peak. We will begin the LSI and DCA samples in the month following the drop, with the idea being that an investor with new cash has just observed a 20% or greater drop in the market and is now deciding between LSI and DCA.

 

In bear markets prices falls due to increased uncertainty, causing concern for investors deploying new cash. High prices can similarly make investors uneasy for fear of investing at a peak. To observe the relationship between market valuations and the relative performance of LSI and DCA we use the monthly Shiller CAPE ratio. Based on data availability we only observe US stock data. We will define expensive as the Shiller CAPE being in the 95th percentile of all historical monthly observations (February 1872 – May 2026). Comparing LSI to DCA when the market is in its 95th percentile of expensiveness, LSI beats DCA 54.24% of the time. 

 

Dollar-cost averaging is the decision to gradually deploy a lump sum of cash into the stock market in order to avoid ex-post regretful timing. We have shown that, on average, dollar-cost averaging consistently trails lump sum investing about two-thirds of the time. This is true across stock markets and throughout history, and it is consistent with the historical nature of the equity risk premium. The implicit historical cost of dollar-cost averaging has been an annualized 0.38% over 10 years when compared to investing a lump sum.

 

When lump sum investing has historically delivered its worst outcomes dollar-cost averaging has looked better than average, but it has not been a consistent remedy. It is not possible to know when lump sum investing will deliver its worst outcomes ahead of time, so we test two forward-looking measures.

 

We find poor results for dollar-cost averaging during bear markets and when stock prices are high. Dollar-cost averaging tends to underperform lump sum investing during bear markets (53.66% of the time) and when stocks are trading in the 95th percentile of historical valuations (63.70% of the time).

 

It's important for Nokia employees to note that given the data that supports lump sum investing, we believe that there is a strong statistical argument to avoid dollar cost averaging unless it is absolutely necessary from a psychological perspective, and if that is the case, we believe that the long-term asset allocation may need to be revised toward a more conservative portfolio.

The Retirement Group is a nation-wide group of financial advisors who work together as a team.

 

We focus entirely on retirement planning and the design of retirement portfolios for transitioning corporate employees. Each representative of the group has been hand selected by The Retirement Group in select cities of the United States. Each advisor was selected based on their pension expertise, experience in financial planning, and portfolio construction knowledge.

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6. Constantin ides, George, (1979), A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy, Journal of Financial and Quantitative Analysis, 14, issue 2, p. 443-450.