Lump Sum Investment Strategy (Buy & Hold, Example, Performance, Returns Analysis)
You might have saved up some money and decided to invest. You already know what you want to invest in, but now you have another decision: When should you invest?
If you research the subject, you will likely come across two main strategies: one-time investment and dollar cost averaging. But what are these approaches, and how do they fit into your overall investment strategy? This article’ll explore the lump sum buy & hold strategy.
Related reading: – Are you looking for a specific investment strategy? (We have plenty more)
Dollar Cost Averaging Strategy
Dollar-cost averaging involves investing a certain amount of money at regular intervals, regardless of stock price or market performance. For example, an investor may buy a certain security for $100 every week for a year. This causes the investor to buy more shares when prices are lower and less when prices are higher.
Dollar-cost averaging allows people to invest without worrying about short-term volatility or trying to time the market. Since it is nearly impossible to predict short-term market ups and downs or the prices of individual stocks, dollar cost-averaging investors prefer to get the average stock price over a selected time period. It also reduces frustration if the investment drops right after the purchase.
Women tend to dollar-average more than men. Why? Because women are not trying to be smart, and thus women get better returns than men.
Lump Sum Investing Strategy
On the other hand, lump sum investing is pretty much exactly what it sounds like: investing a large amount of money all at once. Instead of $100 a week for a year, the one-time investor immediately taps the full amount.
The idea behind the lump sum strategy is that markets tend to rise over time, so it’s best to invest more money up front. Lump sum investing also gives the investor more time to recoup it. Money brings in very little (or nothing) if it sits idle, just waiting to be invested. It’s better to start it from the beginning.
This article will backtest the lump sum investing strategy and approach using Buy & Hold strategy.
Lump Sum Buy And Hold Strategy Portfolio
Since we need to have a portfolio to backtest lump sum buy & hold strategy, we will use the following 5 asset classes with equal portfolio weights:
| Asset Class | Portfolio Weight |
| U.S. Stocks | 20% |
| Foreign Stocks | 20% |
| U.S. Bonds | 20% |
| U.S. REITs | 20% |
| World Commodities | 20% |
- U.S Stocks – U.S. large- and mid-cap growth and value stocks that virtually replicate the benchmark S&P 500 stock index;
- Foreign Stocks – non-U.S. large- and mid-cap stocks of different countries outside the US that have a low correlation with U.S. stocks;
- U.S Bonds – short-, medium- and long-term U.S. treasury, municipal, and investment-grade corporate bonds;
- REITs (real estate investment t