One of the more popular questions I receive from investors is the following:

Is it better to feed money into the market over time or to invest it all at once?

Another way of framing the question is the following:

Which is better — dollar-cost averaging or lump-sum investing?

Since time is the biggest ally your portfolio will ever have, the quicker you get money into the market, the more time that money has to grow. Academic research has shown that, because of the market’s long upward trend, any time you hold money on the sidelines, you are short-changing your investment program. Thus, it would appear that lump-sum investing is the best policy.

Personally, I have no quibble with lump-sum investing. True, you might put the money into the market at the top. However, even if you invest at what turns out to be a short-term top in the market, you’ll probably still make out fine if your investment time horizon is 10 years or longer.

I’m also a realist, however, which means I understand that lump-sum investing may be difficult to do for investors concerned about putting a large sum of money into the market all at once. Unfortunately, people who shy away from lump-sum investing often have no fallback strategy. Rather, they decide to invest the money "when a better time develops." That usually means when the market declines. However, what usually happens is that, when the market declines, investors get scared and believe the market is going even lower. Thus, they don’t invest. And when the market rebounds, they still don’t invest since they don’t want to chase stocks. The upshot is that to delay an investment program often means never starting an investment program.

Because of many investors’ tendencies to avoid lump-sum investing, I believe dollar-cost averaging offers a more feasible approach to investing a large sum of money.

If you think about it, spreading your investments over a period of time is really a form of diversification. Perhaps the best way to achieve time diversification in a portfolio is dollar-cost averaging. Dollar-cost averaging is a mechanical way of investing in the market. Dollar-cost averaging says that you invest the same amount of money in regular intervals in your investments. An example of dollar-cost averaging is investing via electronic debiting (a/k/a ACH or electronic money transfer) of your bank account each month. This service provides an easy way for investors to invest the same amount of money each month in their stocks, regardless of market price. This plan is not intended to assure a profit or protect against a loss in declining markets. When the stock is richly priced, the monthly investment buys fewer shares. When the stock’s price is depressed, the monthly investment buys more shares. Since this plan requires a continuous investment in securities you should consider your financial ability to continue to purchase shares through periods of low price levels.

What I would probably do with a financial windfall or sizable retirement distribution is set some relatively short time limit on getting the money into the market — perhaps 12 months — and feed the money into the market in regular amounts over regular intervals. Again, one could argue, legitimately, that you should put all of the money into the market as soon as possible. However, I think spreading out investments over time is probably a more palatable approach for most investors and one that they’ll likely implement.