Lump Sum Investment Strategy (Buy & Hold, Example, Performance, Returns Analysis With Backtest and Trading Rules)
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.
Key Takeaways
- Investing timing matters alongside asset selection
- Dollar-cost averaging reduces stress from market volatility
- Lump sum investing benefits from long-term market growth
- Markets generally rise over long investment horizons
- Lump sum performs better when invested early
- Diversification across asset classes reduces portfolio risk
- Crises matter less over long-term investments
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 trusts) – they have the same rewards and risks as “traditional” stocks but also have a historically low correlation with “traditional” stocks and various types of bonds;
- Commodities are alternative investment types, including metals, wood, oil, gas, grains, meat, and other tangible commodities. The advantage of commodities is that their market dynamics do not depend on each other and not depend on the market dynamics of stocks, bonds, REITs, and other “traditional” assets.
We have picked these ETFs, which are well diversified, have high liquidity, and a long performance history:
| Portfolio Sector | ETF Name | ETF Ticker |
| U.S Stocks | SPDR S&P 500 ETF Trust | SPY |
| Foreign (International) Stocks | iShares MSCI EAFE ETF | EFA |
| U.S Bonds | Vanguard Total Bond Market Index Fund | BND |
| U.S REITs | iShares U.S. Real Estate ETF | IYR |
| World Commodities | Invesco DB Commodity Index Tracking Fund | DBC |
How We Backtest Lump Sum Buy & Hold Strategy
Backtesting settings and conditions are the following:
Trading Rules
You find the trading rules at the bottom of the article
Lump Sum Strategy Backtesting Before-crisis Interval
Portfolio equity curve:
Portfolio underwater curve (drawdowns, i.e., decline in value from a relative peak value to a relative trough):
Portfolio monthly and annual returns:
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Yr% |
| 2007 | 2.5% | -0.2% | 0.4% | 1.9% | 1.0% | -2.0% | -2.2% | 0.9% | 4.7% | 3.4% | -2.9% | 0.1% | 7.6% |
| 2008 | -1.8% | 0.7% | 0.7% | 4.3% | 2.0% | -3.0% | -2.9% | -1.6% | -6.4% | -19.4% | -7.8% | 4.7% | -28.4% |
| 2009 | -9.0% | -9.2% | 5.0% | 9.2% | 7.5% | -1.2% | 6.2% | 3.7% | 3.0% | -0.7% | 4.7% | 1.7% | 20.7% |
| 2010 | -4.1% | 2.6% | 4.3% | 2.1% | -6.7% | -2.5% | 6.8% | -2.1% | 6.1% | 3.2% | -1.5% | 5.5% | 13.6% |
| 2011 | 2.4% | 3.2% | -0.2% | 3.9% | -1.3% | -2.2% | 0.4% | -3.6% | -8.5% | 8.0% | -1.3% | 0.3% | 0.2% |
| 2012 | 4.1% | 2.8% | 1.2% | -0.1% | -6.3% | 3.7% | 2.1% | 2.3% | 0.8% | -1.1% | 0.9% | 1.3% | 11.8% |
| 2013 | 3.0% | -0.6% | 1.8% | 2.1% | -2.2% | -2.2% | 2.9% | -2.0% | 2.6% | 2.6% | -0.3% | 1.2% | 9.0% |
| 2014 | -1.4% | 4.2% | 0.1% | 1.5% | 1.3% | 1.2% | -1.8% | 1.6% | -3.8% | 1.7% | -0.0% | -2.1% | 2.2% |
| 2015 | 0.1% | 2.4% | -1.5% | 1.2% | -0.5% | -1.8% | -0.5% | -4.1% | -1.6% | 4.4% | -1.3% | -1.6% | -5.0% |
| 2016 | -3.6% | -0.7% | 5.7% | 2.1% | 0.9% | 2.2% | 0.8% | -0.5% | 0.8% | -2.0% | -0.2% | 2.7% | 8.3% |
| 2017 | 0.9% | 2.0% | -0.3% | 0.5% | 0.9% | 0.4% | 2.1% | 0.5% | 1.0% | 1.6% | 1.4% | 1.1% | 12.9% |
| 2018 | 1.9% | -3.8% | 0.6% | 1.0% | 1.4% | 0.2% | 0.9% | 1.0% | 0.3% | -4.8% | -0.5% | -4.9% | -6.8% |
| 2019 | 6.9% | 1.9% | 1.7% | 1.6% | -3.2% | 3.8% | 0.2% | -0.3% | 1.6% | 1.7% | 0.7% | 2.4% | 20.5% |
| 2020 | -1.6% | -5.6% | -12.7% | 5.5% | 3.8% | 2.4% | 3.6% | 3.0% | -2.3% | -2.5% | 8.8% | 3.3% | 4.1% |
| 2021 | 0.1% | 3.3% | 2.2% | 5.1% | 1.9% | 1.7% | 2.1% | 0.9% | -1.8% | 4.9% | -3.6% | 5.3% | 23.9% |
| 2022 | -2.3% | -0.9% | 3.7% | -3.0% | 1.0% | -6.7% | 4.0% | -3.8% | -8.3% | 4.2% | 5.5% | -3.1% | -10.4% |
| 2023 | 5.7% | -3.8% | 1.5% | 1.1% | -3.0% | 3.7% | N/A | N/A | N/A | N/A | N/A | N/A | 5.1% |
Performance statistics:
| Statistical Metric | Value |
| Annual Return % | 4.57% |
| Exposure % | 99.66% |
| Risk Adjusted Return % | 4.58% |
| Max. drawdown | -47.77% |
| CAR/MaxDD | 0.10 |
| Standard Deviation | 16.19% |
| Sharpe Ratio (3% risk-free) | 0.10 |
| Ending capital | 20 873 USD |
Lump Sum Strategy Backtesting At-bottom-of-crisis Interval
Portfolio equity curve:
Portfolio underwater curve (drawdowns, i.e., decline in value from a relative peak value to a relative trough):
Portfolio monthly and annual returns:
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Yr% |
| 2009 | N/A | N/A | N/A | N/A | 7.4% | -1.2% | 6.3% | 3.8% | 3.0% | -0.8% | 4.7% | 1.8% | 27.4% |
| 2010 | -4.1% | 2.6% | 4.3% | 2.1% | -6.7% | -2.5% | 6.8% | -2.1% | 6.1% | 3.2% | -1.5% | 5.5% | 13.6% |
| 2011 | 2.4% | 3.2% | -0.2% | 3.9% | -1.3% | -2.2% | 0.4% | -3.6% | -8.5% | 8.0% | -1.3% | 0.3% | 0.2% |
| 2012 | 4.1% | 2.8% | 1.2% | -0.1% | -6.3% | 3.7% | 2.1% | 2.3% | 0.8% | -1.1% | 0.9% | 1.3% | 11.8% |
| 2013 | 3.0% | -0.6% | 1.8% | 2.1% | -2.2% | -2.2% | 2.9% | -2.0% | 2.6% | 2.6% | -0.3% | 1.2% | 9.0% |
| 2014 | -1.4% | 4.2% | 0.1% | 1.5% | 1.3% | 1.2% | -1.8% | 1.6% | -3.8% | 1.7% | -0.0% | -2.1% | 2.2% |
| 2015 | 0.1% | 2.4% | -1.5% | 1.2% | -0.5% | -1.8% | -0.5% | -4.1% | -1.6% | 4.4% | -1.3% | -1.6% | -5.0% |
| 2016 | -3.6% | -0.7% | 5.7% | 2.1% | 0.9% | 2.2% | 0.8% | -0.5% | 0.8% | -2.0% | -0.2% | 2.7% | 8.3% |
| 2017 | 0.9% | 2.0% | -0.3% | 0.5% | 0.9% | 0.4% | 2.1% | 0.5% | 1.0% | 1.6% | 1.4% | 1.1% | 12.9% |
| 2018 | 1.9% | -3.8% | 0.6% | 1.0% | 1.4% | 0.2% | 0.9% | 1.0% | 0.3% | -4.8% | -0.5% | -4.9% | -6.8% |
| 2019 | 6.9% | 1.9% | 1.7% | 1.6% | -3.2% | 3.8% | 0.2% | -0.3% | 1.6% | 1.7% | 0.7% | 2.4% | 20.5% |
| 2020 | -1.6% | -5.6% | -12.7% | 5.5% | 3.8% | 2.4% | 3.6% | 3.0% | -2.3% | -2.5% | 8.8% | 3.3% | 4.1% |
| 2021 | 0.1% | 3.3% | 2.2% | 5.1% | 1.9% | 1.7% | 2.1% | 0.9% | -1.8% | 4.9% | -3.6% | 5.3% | 23.9% |
| 2022 | -2.3% | -0.9% | 3.7% | -3.0% | 1.0% | -6.7% | 4.0% | -3.8% | -8.3% | 4.2% | 5.5% | -3.1% | -10.4% |
| 2023 | 5.7% | -3.8% | 1.5% | 1.1% | -3.0% | 3.7% | N/A | N/A | N/A | N/A | N/A | N/A | 5.1% |
Performance statistics:
| Statistical Metric | Value |
| Annual Return % | 7.71% |
| Exposure % | 99.97% |
| Risk Adjusted Return % | 7.71% |
| Max. drawdown | -27.18% |
| CAR/MaxDD | 0.28 |
| Standard Deviation | 13.63% |
| Sharpe Ratio (3% risk-free) | 0.33 |
| Ending capital | 28 583 USD |
Lump Sum Strategy Backtesting After-crisis Interval
Portfolio equity curve:
Portfolio underwater curve (drawdowns, i.e. decline in value from a relative peak value to a relative trough):
Portfolio monthly and annual returns:
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Yr% |
| 2012 | 2.6% | 2.8% | 1.2% | -0.1% | -6.3% | 3.7% | 2.1% | 2.3% | 0.8% | -1.1% | 0.9% | 1.3% | 10.2% |
| 2013 | 3.0% | -0.6% | 1.8% | 2.1% | -2.2% | -2.2% | 2.9% | -2.0% | 2.6% | 2.6% | -0.3% | 1.2% | 9.0% |
| 2014 | -1.4% | 4.2% | 0.1% | 1.5% | 1.3% | 1.2% | -1.8% | 1.6% | -3.8% | 1.7% | -0.0% | -2.1% | 2.2% |
| 2015 | 0.1% | 2.4% | -1.5% | 1.2% | -0.5% | -1.8% | -0.5% | -4.1% | -1.6% | 4.4% | -1.3% | -1.6% | -5.0% |
| 2016 | -3.6% | -0.7% | 5.7% | 2.1% | 0.9% | 2.2% | 0.8% | -0.5% | 0.8% | -2.0% | -0.2% | 2.7% | 8.3% |
| 2017 | 0.9% | 2.0% | -0.3% | 0.5% | 0.9% | 0.4% | 2.1% | 0.5% | 1.0% | 1.6% | 1.4% | 1.1% | 12.9% |
| 2018 | 1.9% | -3.8% | 0.6% | 1.0% | 1.4% | 0.2% | 0.9% | 1.0% | 0.3% | -4.8% | -0.5% | -4.9% | -6.8% |
| 2019 | 6.9% | 1.9% | 1.7% | 1.6% | -3.2% | 3.8% | 0.2% | -0.3% | 1.6% | 1.7% | 0.7% | 2.4% | 20.5% |
| 2020 | -1.6% | -5.6% | -12.7% | 5.5% | 3.8% | 2.4% | 3.6% | 3.0% | -2.3% | -2.5% | 8.8% | 3.3% | 4.1% |
| 2021 | 0.1% | 3.3% | 2.2% | 5.1% | 1.9% | 1.7% | 2.1% | 0.9% | -1.8% | 4.9% | -3.6% | 5.3% | 23.9% |
| 2022 | -2.3% | -0.9% | 3.7% | -3.0% | 1.0% | -6.7% | 4.0% | -3.8% | -8.3% | 4.2% | 5.5% | -3.1% | -10.4% |
| 2023 | 5.7% | -3.8% | 1.5% | 1.1% | -3.0% | 3.7% | N/A | N/A | N/A | N/A | N/A | N/A | 5.1% |
Performance statistics:
| Statistical Metric | Value |
| Annual Return % | 5.97% |
| Exposure % | 99.97% |
| Risk Adjusted Return % | 5.97% |
| Max. drawdown | -27.18% |
| CAR/MaxDD | 0.22 |
| Standard Deviation | 12.21% |
| Sharpe Ratio (3% risk-free) | 0.25 |
| Ending capital | 19 439 USD |
The Lump Sum Buy & Hold Strategy – Conclusion
In hindsight, it’s easy to see which option would have led to the best outcome – just look over the numbers to see which option led to more money.
Unfortunately, we must decide now, not in the future, and we don’t know when the stock market will head south. Successful investing is choosing the path that gives you the best chance of success. Historically, the choice that provides a higher probability of success is obvious: lump sum investing and ensuring you are invested all the time and over long-term horizons – preferably at least ten years.
The earlier you start investing, the more you will earn on average. The total profit for the before-crisis lump sum investment (backtest 1) is higher than the after-crisis lump sum investment (backtest 3). Just look at appropriate equity curves. The consequences of a financial crisis are “small” in the long run: it becomes insignificant over a long-term investment horizon.
Related Reading: Money management Strategies
FAQ:
What is lump sum investing?
Lump sum investing involves putting a large amount of money into the market all at once. Instead of spreading investments over time, it aims to capitalize on the potential long-term growth of the market. Lump sum investing allows for immediate exposure to market gains, potentially maximizing returns. It also provides more time for invested money to grow compared to waiting and investing incrementally.
How does dollar-cost averaging work?
Dollar-cost averaging is a strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions. This approach helps smooth out the impact of market volatility. The choice between lump sum and dollar-cost averaging depends on individual preferences and risk tolerance. Lump sum investing may offer higher returns in the long run, while dollar-cost averaging provides a more stable approach.
How does the lump sum buy and hold strategy work?
The lump sum buy and hold strategy involves investing a significant amount in a diversified portfolio and holding onto those investments over the long term, irrespective of short-term market fluctuations. A well-diversified lump sum buy and hold strategy may include U.S. stocks, foreign stocks, U.S. bonds, U.S. REITs, and world commodities. Each class contributes to a balanced and diversified portfolio.