Is cost averaging the way to go at this stage?

Manesova83

iglad wrote: »

The time to invest in the market is right now!

Also please note just because a stock is cheap doesn't mean it will go up in price. I should know I own Lloyds shares.

Good advice

And yes I know. I'm keeping things simple by investing in a global ETF and avoiding individual stocks.

jsinc

Manesova83 wrote: »

I always hear this. But say you cost average with a proportion of the money you have left each month, while keeping some behind for downturns, surely it's not that hard to improve your returns compared to those who avoid market timing altogether. While it's virtually impossible to time the bottom perfectly, it's not hard to buy the dip at some point.

One could have a rule, for example, when they invest half their free money each month and keep half behind. Then when the market drops, say, 30%, stick in whatever has been kept behind over the preceding months or years.

It's not hard to buy the dips at some point. The difficulty is outperforming not doing so by holding cash with the intention of buying-in later.

There are studies on market timing, and lump sum or dollar cost averaging vs. buying the dips. Conclusions aren't favourable to timing or mechanically buying dips, even with perfect foresight (in terms of returns and/or relative risk). Maybe past performance tells us little about the future, and I'd have to concede to zero proof. However future unknowability also works against the likelihood of prediction and disproving historical conclusions. Pair that with stuff like the psychological challenge of buying into a falling market - and I'm fairly comfortable saying such a rule will fail far more often than not.

I guess there may be a difference between waiting for a 30% drop & investing according to your own price vs. value metric which may incorporate timing. I don't think either approach is optimal but appreciate that much of the industry sells the supposed genius of the latter which perhaps muddies the water.

AnotherJoe

Manesova83 wrote: »

Your first question is nonsensical, so I won't reply to that.

As for the second point, I understand that markets go up and down cyclically, and that stocks are better value during a recession than towards the end of a bull market. I didn't 'profess' to know any more than that, and was merely after a bit of advice.

So it looks like the consensus is to cost average all the way rather than waiting for a right moment that may never come. That's what I was after, so thanks everyone!

Its nonsensical to ask "since its so simple, why isn't everyone else doing it as well?"
Many much cleverer people than you or i have spent years and billions of dollars with the biggest supercomputers on the planet searching for patterns that you think are "simple" And yes, if it was that simple for you , you would be a millionaire.


If it was as simple to "buy the dips" as you say, and it was such a good idea, why wouldnt you use all your money instead of wasting some of it on whats a worse strategy, buying as you go? And what dips would you buy? Serious question How do you know whats a dip? Say a stock is 100 today, 105 tomorrow, 109 the next day and 104 the following day, is that 104 a dip you would buy on? What if its 98 the next day, better to buy then, but you already spent your money buying at 104 so you cant. Or would you wait until it went below 100? Maybe it never will.

Audaxer

Manesova83 wrote: »

Thanks for all your replies.

I get that market timing is best left for professional traders. And I don't proclaim to know anything that others do not. The only reason I am thinking about this is because we are currently in a record-breakingly long bull market, suggesting the next downturn is probably not too far away.

I don't intend to sell anything. I am just wondering whether to keep putting everything that I don't spend each month into my global ETF, or whether to hold back a bit and wait.

I'm in my mid 30s, so I'm looking at being invested for 20 years at least. I get that over that time, one would expect to do pretty well out of the stock market, but still, I'd like to maximise any gains by buying more stocks when they are clearly cheaper.

I know what you mean, but it isn't easy to do. For example UK markets are roughly at the same levels they were 2 years ago. So if you had held back on investing in the UK at that time while waiting for the crash, you would have missed out on dividends during that time. As you are only in your mid-30s, I think it would be better just to keep investing the same monthly amounts irrespective of what's happening in the markets. If you find that you have some extra cash to spare when the crash does come, you could always invest the extra cash at that time.

capital0ne

Manesova83 wrote: »

But I'm wondering if it would be better to stick the money in an easy-access savings account and bide my time, and then buy the market when/if it drops 30% or more.

Wait and wait and wait, oops too late it's gone up again, ah well, just wait a bit longer.....
It's a losers game waiting, you've lost out on dividends is the main losing bit.
Everyone knows that the main increase in a nice balanced portfolio of shares is in dividend re-investment, not in the share price movement.
The adage is "Time in the market, not timing the market"

So my tip just invest now, don't wait, you'll wait forever under some excuse or other.

good luck

This was in the Telegraph a while ago

https://www.telegraph.co.uk/investing/income-iq/miracle-effect-dividends/
"If dividends were taken as cash since 2000, a 47.6pc return would have been made, equating to a compound annual growth rate (CAGR)* of 2.34pc. Had the investor reinvested these dividends to re-purchase shares, the “total return” would have been 79.6pc, providing a much greater CAGR of 3.54pc – more than 1.5 times the rate offered on a cash-return basis. This compares with negligible capital growth for the FTSE, which was below 7,000 last week compared to the 6,930 high of late 1999."

Alexland

capital0ne wrote: »

Everyone knows that the main increase in a nice balanced portfolio of shares is in dividend re-investment, not in the share price movement.

Terry Smith would argue it's the appropriate reinvestmemt of retained earnings that give a good company the best ability to grow value. By reinvesting dividends you are paying the same book value multiplier as a new shareholder.

Alex

seacaitch

Manesova83 wrote: »

The only reason I am thinking about this is because we are currently in a record-breakingly long bull market, suggesting the next downturn is probably not too far away.

You need to be careful making this type of statement/assessment/inference based on only superficial knowledge of market history...

Summarising/plagiarising a post I've written before:

Depending on how you choose to define a bull market, or read the tea leaves, you can draw whatever picture - and inferences - you like...

I don't personally find the "prices that continue rising without being interrupted by the 20% decline" bull market definition that interesting. 20% declines can just be normal volatility (indeed, we've just had one of 20.2% in the SPX from Sep-Dec 2018), not something to be so concerned about or impactful upon long term returns as a so-called secular bear market would be; a secular bear market being a lengthy, mean-reversionary period following a secular bull market whose extremes in behaviour, credit, and price require a lengthy resetting period during which those excesses can be worked through.

Consequently, I find the following chart a lot more interesting:
https://i.pinimg.com/originals/31/79/24/317924a1a770f9478426b98e7f029fb2.png
...illustrating as it does the 18 year secular bull market from 1982 to 2000.

Using this template, you can argue a case that a US secular bull market commenced in spring/summer 2013, when the SPX decisively broke out above its 2000 and 2007 market highs and then never looked back. If this new secular bull market enjoyed an 18 year duration similar to the prior one, it would last until 2031, 12 years hence. Of course, lots of volatility along the way would be expected, just as the 1982-2000 secular bull market experienced with events such as 1987's 'crash' and 1997 Asian financial crisis, which the chart above illustrates were something for investors to sit tight through for the good returns still to come.

Clearly, valuations and interest rates were very different in 1982 than they were in 2013. It would be foolhardy to draw too much comparison about the possible returns possible from any current secular bull market as there is not the same scope for Price/Earnings ratio expansion to occur because of a declining risk free rate as happened from 1982-2000 (and indeed, the opposite impetus may eventually one day occur).

However, it may still be useful to consider the rises that markets have enjoyed these past years within a broader historical context perhaps more appropriate to the timeframes (many decades) that most of us are investing over.

You wrote:

Manesova83 wrote: »

I'm in my mid 30s, so I'm looking at being invested for 20 years at least. I get that over that time, one would expect to do pretty well out of the stock market, but still, I'd like to maximise any gains by buying more stocks when they are clearly cheaper.

Given your age, your investment time horizon could well be 50+ years, not 20 years, and depending on when you retire you're likely not even halfway through your contribution period, with future contributions likely to be higher than past contributions if you have a rising earnings curve.

Given all the above, in your position I would not fear down-markets remotely - which you'll benefit from my buying more units at lower prices should/when they occur in the couple of decades ahead - and nor would I be banking on them occurring anytime soon, because to do so could backfire on you badly if the future trajectory of markets fails to cooperate with your hopes for imminent significant falls.

aroominyork

There are two reasons for not investing your lump sum now. They seem the same but they are subtly different.

The first is that you are concerned about the markets crashing the day after you invest. If that’s your concern see the link about Bob at post #12.

The second reason is that you think prices will fall and you will pick up cheaper shares. That’s where timing the market comes in, how you choose the right time to invest, and whether you will have the guts to invest when the world is mired in the depths of recession.

Which is your situation?

Somewhere in the Pensioncraft videos is some evidence/advice saying that if you want to drip feed a lump sum, do it over a year at most. That sounds like good advice. I am likely to receive a significant lump sum soon and I can imagine investing 40% immediately and then 20% after each subsequent three or four months.

Manesova83

AnotherJoe wrote: »

Its nonsensical to ask "since its so simple, why isn't everyone else doing it as well?"
Many much cleverer people than you or i have spent years and billions of dollars with the biggest supercomputers on the planet searching for patterns that you think are "simple" And yes, if it was that simple for you , you would be a millionaire.


If it was as simple to "buy the dips" as you say, and it was such a good idea, why wouldnt you use all your money instead of wasting some of it on whats a worse strategy, buying as you go? And what dips would you buy? Serious question How do you know whats a dip? Say a stock is 100 today, 105 tomorrow, 109 the next day and 104 the following day, is that 104 a dip you would buy on? What if its 98 the next day, better to buy then, but you already spent your money buying at 104 so you cant. Or would you wait until it went below 100? Maybe it never will.

Again, I think you misunderstand me. I'm not saying it's simple to become a market-beating trader. I merely pointed out that it's simple to buy stocks during a downturn, in the same way that it's simple to buy goods in a sale. Whether or not that's a good idea or not is a different matter, and that's why I'm here - for advice, not an argument.

Manesova83

Thanks all. I appreciate the advice. I think I'll continue to cost average come what may, and if I happen to have a bit of extra cash to invest come a downturn, I'll buy more while stocks are relatively cheap.