The Lump-Sum Trading Strategy has been around for a while and most people have made tremendous profit trading with the Lump-sum strategy. Are you an employee saving your earnings to invest in a particular market, an heir to some inheritance, you got lucky and stumbled into fortune, or you just found yourself with a substantial amount of money? If you fall under any of these categories and wish to invest your capital, which strategy will you find more effective? Though lots of strategies prove effective, Lump Sum investing seems to be a better strategy.
What is Lump-sum Trading Strategy?
In the simplest of terms, lump-sum strategy means damning the risk or consequences and going all in.
Lump-Sum strategy or massive investing is putting all one’s money into the market immediately at one go. What this means is this: if I have a large sum of money, I would put it into the market immediately To buy those shares/stocks instead of buying in bits as one sees in the dollar-cost averaging strategy.
Note: Dollar-cost averaging is an investment plan that involves investing a fixed amount of money at regular intervals (monthly, usually) over a rather long period in a particular stock.
A lump-sum strategy is a long-term investment strategy and of course, using a lump sum strategy means that one intends to be a long-term investor and a long-term investment is always best. Long-term investors refer to persons willing to incur risk for a certain amount of potentially huge returns and who also have a lot of capital to continue investing at such a pace over some time.
Understanding lump-sum Trading Strategy
As far as lump-sum strategy is concerned, all the money at your disposal goes into the stock market or buying of bonds immediately. If the market is favorable at that time, then you make lots of profits over your invested capital. This saves you from having to buy the same stocks, bonds, or assets for a higher price if the markets project positively. On the other hand, if the markets go south, then your stock well as your invested capital crashes along with the market. The disadvantage will be your inability to purchase more assets since you had all your capital invested all at once.
Although the dynamics of the market are constantly changing and it’s difficult to predict how markets would turn out from time to time, from the market’s available data, one can foretell what the future holds through past performances. Generally, every market fluctuates- it goes up and down, this means that even if you incur a loss, you stand the chance of making profits and recovering your losses as time goes on. So generally speaking, a lump-sum strategy isn’t a bad idea at all.
Lump-sum investors are mostly called diamond hands since they don’t panic at market fluctuations knowing that what goes down will surely come up with time- this is a sure bet.
According to a report by Northwestern Mutual, a lump sum investment is likely to give more profits and greater returns over time. A lump-sum strategy always comes out better than dollar-cost averaging. Lump-sum investing embraces all the ups and downs, crashes, and rise of the market, all for the benefits of long-term returns or profits as a lump-sum strategy is always the better choice to create huge wealth.
Another thing to understand about the lump-sum strategy is to capitalize on what works best for you in the long run. If already you have a job with a low amount of money, it makes sense to employ the dollar-cost averaging strategy as it works well with those with little amounts of money. However, it’s quite different when you have a huge amount of money. When you do have a huge windfall, investing it immediately and directly is guaranteed to generate even better returns than what you have currently. Sure, it’s a big risk but the potential profit is bigger which makes it all the more reason to invest using a lump sum strategy.
Pros and cons of lump-sum trading Strategy
- It wouldn’t be a good idea if we don’t show you appropriately the benefits and downsides of the lump sum strategy. This is what we shall be doing immediately.
Firstly, there’s a saying that goes this way: “time in the market beats timing the market”. What this means is this: where the money is available, it’s much more prudent to invest it in the market all at once instead of timing the market to get that which favors you instead of investing as much money as possible in the market.
What is the downside? Well, you need to have a lump sum to invest with. All the huge returns all stem from huge investments hence the reason they’re called lump sum investments. The basic reason people turn to dollar-cost averaging or the reason why lots of people don’t even invest is that they keep saving up money.
Hence, saving up money is never a smart decision because cash in savings earns nothing as inflation is always on the rise and makes redundant money like savings lose their value. The practical thing would be to invest all the money in the market where it would earn even higher revenue by generating great profits. However, the downside to this is that where there’s a sudden market crash, the result would be a loss and a crash for the investment as well. Nevertheless, a lot depends on your personality and planning.
- Additionally, another benefit of the lump-sum strategy is that unlike dollar-cost averaging, you don’t get to pay commissions or brokerage fees a lot. At the most, you pay once and you are done. Also, the anxiety of constantly checking market transactions is dramatically reduced since it’s a one-time and direct investment with no need for the entire craze that comes with dollar-cost averaging.
Note: This doesn’t mean that you shouldn’t check out the market from time to time.
These are the benefits as well as the downsides of this strategy. As much as using this strategy has always proved effective, you should always measure the risks associated with any investment you wish to embark upon. If you are scared, always bear in mind that life alone is a risk, where there are no risks there are no rewards – the greater the risk the greater the profit.
How to get started with Lump-Sum Trading Strategy
Now, this has been settled, how do you go about lump sum investment? The first step with this is simply to choose a brokerage account, deposit the money in such account and then proceed to purchase the stock. It becomes easy from there. In lump-sum investing, the brokerage could come with low costs and no commission. The same applies to cryptocurrencies, choose an exchange, register, purchase your desired digital assets and store them in your desired wallet.
It is extremely important to diversify your investments. It becomes very significant once it comes to lump-sum investing. If a lump so the strategy is going to be employed, don’t put all your money into a single stock alone, it is more strategic to invest in several different stocks. For example, try investing in a mutual fund or ETF. Investing in mutual funds or ETFs is a bit more secure as it allows you to own a different stock which means that you don’t need to worry about the stock of one company suddenly failing or crashing.
Note: mutual funds are a collection of investment assets put together as a single investment pool. ETF means exchange-traded fund which allows investors to buy many stocks in different companies at once.
Mutual funds and ETFs are more secure and rewarding, all the more reason to use a lump sum strategy to buy them up. Mutual funds and ETFs brought in a lot of profits since they’re tied to the different companies whose shares are on the SP500 (which includes the stocks of the most successful companies in the United States)
A lump-sum strategy is a useful investment plan if you have the necessary finances needed for the market. If you do, please take that risk and make that investment at once.
This strategy can be used in any investment of choice as long as profits are involved. With the recent trend, digital assets like cryptocurrencies seem to be the new gold mine. Hence leveraging on this practice while you invest in the various blockchain projects will surely bring huge returns on investment.