What the "correction" means for us newbies

dunstonh

Nasqueron wrote: »

My profile I think is a 6 and my S&S ISA (through an IFA) is down about 3%, I appreciate it's only been a year but it is quite frustrating on the numbers early on when I can get 2-3% interest on cash, but I guess over 5 years or so it'll balance up, so long as it eventually covers the adviser's fee and gets me a profit I'll be happy, until then I keep investing monthly

in simple terms, in a 5 year period you would expect a bad year, a nothing year and three positive years. You never know the order they will come.

Plus, like any house that is on a floodplain with a 1-20 year floor risk, it doesnt mean you will get a flood every 20 years. You could go 40 years without and then get two in a row.

We had someone that invested a couple of months ago who has mumbled about the loss but they were well trained to know that it could happen. We had another that managed to get in at the bottom of the recent drop and he is beaming. Pure luck or bad luck in the short term but in the long term, it really wont make a lot of difference.

Nasqueron

Yeah I appreciate it's long term, I understand there are risks with the S&S ISA but long term the growth should really be more once there is a decent sum in there (was doing £150 a month for the first year, now £200). It's the same as the pension, was well up earlier this year, now it's about £1500 down but that's for 30 years away so hopefully it ends up higher

dunstonh

As a regular contribution, you should be loving these early period declines. They are needed with regular contributions.

You just have to look what happened to endowments when you go an extended period without any negative period. And how endowments improved a few years after the credit crunch as the investments purchased between 2008 and 2012 went on to boost them.

If you were doing a regular contribution plan for 15 years, you would want the first 10 years to have mostly negatives.

tel_

So after posting this message (see quote below), I have today been thinking about dropping another lump sum into my S&S ISA, as well as my regular monthly contribution.

Talk about changing my mind!!

tel_ wrote: »

The money I've drip-fed thus far has returned me a loss of nearly 9%. I don't think I want to stop investing for the time being in my S&S ISA, but was thinking of halving my contribution to £500 for the time being, until hopefully things settle a bit.

bowlhead99

tel_ wrote: »

So after posting this message (see quote below), I have today been thinking about dropping another lump sum into my S&S ISA, as well as my regular monthly contribution.

Talk about changing my mind!!

It does make more sense to be adding more to your investment rather than adding less to your investment, now the markets are a bit cheaper.

If it keeps going down, you'll curse that your investments are now worth less, but the new money is buying more assets per pound, so there's a silver lining. Alternatively if you didn't add your extra lump, and things go up, you will be happy your assets are rising in value but cursing the fact that you missed the opportunity to buy more when they were temporarily cheaper.

If you just have the mindset of buying whenever you have spare cash available you will be doing a long term 'drip feed' process, whether or not the monthly or quarterly or annual amounts are equal and no matter how many 'lump sums' you end up throwing into the pot from time to time. You will be buying at a whole range of prices for years to come.

You can't be sure that the current 'lump sum' will be invested at the cheapest possible price that will be available in the next few years... but you can probably be sure it will be invested at a cheaper price than was available a couple of months ago, because most asset classes have come off a little (some more than others). So an investment made today might or might not end up producing abnormally high or low returns, but you at least know it won't be the worst possible return, because you bought at a cheaper price that you'd have needed to pay if shopping in July or August for example.

Good luck with your investing. Luck is a nice thing to have. But in the long term, well-diversified investment funds should return more than cash without you needing to be particularly lucky. It's just how economics works. But it does require you to be in it for the long haul to reach that long term expectation and ignore the ups and downs along the way - rather than get a short term result which might be quite haphazard in terms of what gains or losses arrive when.

Alexland

tel_ wrote: »

Talk about changing my mind!!

Before you are too impulsive think through how you would feel if it dropped further and make sure you are completely comfortable with your decision. The worst thing that could happen is the market keeps falling, you despair the markets may never recover (sometimes it feels like that when you see the news), and you make the behavioural error of selling low.

Alex

tel_

I'm truly grateful for your words of wisdom bowlhead99. Thanks for taking the time to post such an interesting view :T:

tel_

I'm curious now to see how many units my next payment will buy Alexland at the end of the month, so I will wait until then to decide weather or not to make an extra purchase.

I think that's the best thing for me to do as I'm new to stocks & shares investing.

I'm finding the whole process fascinating though.

Iain_For

My wife and I have identical ISAs. Her’s is down 3.89%, mine down 3.58% since August. Since April, her’s is up 0.38%, mine up 1.72%. The difference? Purely fortuitous, I invested this years ISA as a lump sum in April when markets were low, she drip fed April through August. This is all exceedingly short term, however, and I doubt whether either approach will have any significance long term compared to time in the market, which will be nearly identical in both cases.

masonic

Iain_For wrote: »

My wife and I have identical ISAs. Her’s is down 3.89%, mine down 3.58% since August. Since April, her’s is up 0.38%, mine up 1.72%. The difference? Purely fortuitous, I invested this years ISA as a lump sum in April when markets were low, she drip fed April through August. This is all exceedingly short term, however, and I doubt whether either approach will have any significance long term compared to time in the market, which will be nearly identical in both cases.

As you might imagine, sudies have been done on the subject and it's even been the topic of a student's MA dissertation:
http://www.efficientfrontier.com/ef/997/dca.htm
https://personal.vanguard.com/pdf/s315.pdf
http://valueaveraging.ca/research/DCA%20Investigation%20Study.pdf

The TL;DR is that more often than not, lump sum investing leads to a better long term outcome, but the opportunity cost of short-term drip feeding of a lump sum may be worth paying to avoid the psychological pain of a worst case outcome.

In any case, many people have their income drip-fed to them, so in that case drip feeding gets the money invested sooner than saving up a lump sum and gives drip feeding the advantage.