Pros and Cons of Lump Sum Investing

Investing strategies are often a balancing act between risk and potential return, influenced heavily by the time horizon of one’s financial goals. We reviewed historical data from the S&P 500®Total Return (TR) Index from 1937 through 2022. The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization. This will provide us with a nuanced perspective on how different investment time frames might perform, reminding us that past performance is not indicative of future results. Please note that the total returns displayed below represent historical data from a stock index and therefore it does not reflect things like taxes or management fees.

Short-Term Investment Horizons: A Closer Look at Risk

Shorter investment horizons have displayed a more pronounced risk of loss, despite the same average annual return across different time frames.

• Rolling 1-Year Low: -37.00%
• Rolling 3-Year Low: -14.55%
• Rolling 5-Year Low: -7.47%

These statistics suggest that the shorter the investment period, the higher the likelihood of a loss, even though the average annual return remains constant at 10.35%.

The Strategy for Investing when you have Short-Term Goals: Earmark and Invest

The historical performance data suggests that shorter-term investing periods are more likely to have losses. Therefore, it is prudent to earmark funds that are likely to be used in the short term in stable investments like cash or shorter-term bonds.

Long-Term Investment Horizons: Assessing the Probability of Positive Returns

Longer-term investment horizons have historically been more forgiving.

• Rolling 20-Year Low: 5.62% return
• Rolling 30-Year Low: 9.43% return

These figures suggest that while the possibility of loss still exists over the long term, such occurrences tend to be less prevalent.

The Strategy for Long-Term Goals: Lump-Sum Investing

For investors with a long-term perspective, lump-sum investing might be a more suitable approach. This is because the longer you invest, the more likely you are to earn the long run average return. So even if you do face a bad 3-year period in the market, over time it is likely to offset these early losses.

• The Power of Compounding: Over longer periods, the market's growth trajectory has the potential to result in significant returns.
• Historical Trends: Market advances over time often outweigh periods of decline.

Key Takeaways

• Short-term horizons: Earmark funds for the short term in stable investments and allocate long term funds in long term investments.
• Long-term horizons: Lower risk of loss; consider lump-sum investments.

This chart explains why markets can be maddening to follow and why lump-sum investing can be difficult to watch. Even after waiting a decade, the average return has ranged between -1.38% per year to 19.94% per year. As you can see and as described above, the longer the investment period the tighter a portfolio should cling to the long run averages. This is why time in the market is so important.

Should you have any questions regarding allocating your portfolio feel free to reach out to one of our advisors and we can discuss options for your situation.

Important Disclosures: Data presented in this article is historical in nature, from the S&P 500® index. The raw data used for this article was provided by Morningstar. Rolling averages were calculated by Wooster Corthell Wealth Management, Inc. (WCWMI). These rolling averages do not represent performance achieved by WCWMI’s portfolio. Given its historical nature it does not calculate taxes or management fees. Returns are based on calendar year returns only. Larger losses or higher gains could have occurred over periods with the same time periods if not assessed only using the calendar year returns. Past performance does not guarantee future results. It is essential to align your investment strategy with your financial goals, circumstances, and risk tolerance.