2 year investment journey so far, trying not to feel disheartened.

LHW99

A few years back I told my son not to worry if his pension fund went down, but to look at it as buying a few more units each month. In particular I said - what you want is for the market to drop significantly, but then go up massively just before retirement (though it won't happen like that).

About 6 months later Covid hit......

OldScientist

masonic said:

OldScientist said:

Outcomes have been very variable historically. Here is the final portfolio value (in real terms) after 25 years where the accumulator has invested £1k inflation adjusted per year over a period of 25 years starting in different years*.



In the worst cases (a few of the 25 year periods starting in the late 19th century) the investor barely got back (in real terms) what they invested. In the median case, they had about £63k (in real terms), while in the best case they had just over £200k.

Which of these historical paths the future will most resemble is impossible to predict, but it might be worth noting that using cash instead of equities produced a worst case of £15k, a median case of £28k and a best case of about £45k - in other words, pretty poor compared to equities. So to quote Jack Bogle "Invest we must" even though the variability and lack of apparent progress is sometimes difficult to stomach.

* I've used returns and inflation data from macrohistory.net and a portfolio consisting of 50% UK equities and 50% US equities as an example and UK inflation. The returns on 3 month T-bills have been used as a proxy for cash.

It's interesting to see the effect of asset allocation on the results there. 50% UK equities would not be something many would advocate today and it seems to have changed the profile somewhat. Perhaps by compressing the upside rather than limiting downside. It would certainly suck to retire in the early 1980s, a few years after your older brother.

I've never got around to constructing a cap-weighted return series from the macrohistory data (it is possible, see https://monevator.com/world-index/ ), but I'd expect the 50/50 UK/US to be a sufficient approximation (e.g., taking UK only, the amounts accumulated are lower than the mixed portfolio). For me the point is not obtaining exact values, but getting a handle on reasonable estimates of the range of values. In reality, for early accumulators like the OP, the only real choice is to invest as much as they can for as long as they can and hope for the best! It has to be said, that later on in accumulation (final 20 years or so) it may be worth investing in some inflation linked gilts provided real yields are 'high' (e.g., since they are currently over 2% this may, or may not, be better than future equity returns).

dunstonh

SneakySpectator said:

I've been investing for 2 years now, I started off with £500 just to test the waters and then a lump sum and then pound cost averaged in each month, then did another lump sum recently during the tariff crash so the chart looks a bit distorted but here's my progress so far. 

I was up like 26% or so at one point before the tariff crash and now I'm back down to 9.20%. I'm trying not to let it affect me and just focusing on the long term average as I will be going at this for about 20 - 25 years longer.

Despite having like 16.8% less return than before, my portfolio is literally at all time highs so I guess I should look at it that way right?

You should be cheering about the drop. It's great news for regular contributions and nothing to be disheartened about at all.  You want more drops.     

However, your investment behaviour is your greatest risk.   This is the mildest stockmarket crash in the last 30 or so years.   Yet you are concerned.     Stock market crashes occur around every 1 in 4/5 years.    So, none of this should surprise you when they happen.  If you react to them in the wrong way, you can create the real losses.

SneakySpectator

dunstonh said:

SneakySpectator said:

I've been investing for 2 years now, I started off with £500 just to test the waters and then a lump sum and then pound cost averaged in each month, then did another lump sum recently during the tariff crash so the chart looks a bit distorted but here's my progress so far. 

I was up like 26% or so at one point before the tariff crash and now I'm back down to 9.20%. I'm trying not to let it affect me and just focusing on the long term average as I will be going at this for about 20 - 25 years longer.

Despite having like 16.8% less return than before, my portfolio is literally at all time highs so I guess I should look at it that way right?

You should be cheering about the drop. It's great news for regular contributions and nothing to be disheartened about at all.  You want more drops.     

However, your investment behaviour is your greatest risk.   This is the mildest stockmarket crash in the last 30 or so years.   Yet you are concerned.     Stock market crashes occur around every 1 in 4/5 years.    So, none of this should surprise you when they happen.  If you react to them in the wrong way, you can create the real losses.

It's probably just because it's my first. I wasn't invested when covid hit so this is the first real drop I've had and that 20% decline in a matter of 2 months did catch me off guard a bit but I didn't sell, it didn't even cross my mind... I only added more, hence the huge spike in the 3rd chart.

It's a bit of a paradox really because on the one hand I want the market to go lower for a bit so I can accumulate a good amount of shares at a low price. But then when the market does go lower, I see all my gains erased and it messes with my positivity. 

But it's fine, I just need to stick with my plan that's it.

Cus

dunstonh said:

SneakySpectator said:

I've been investing for 2 years now, I started off with £500 just to test the waters and then a lump sum and then pound cost averaged in each month, then did another lump sum recently during the tariff crash so the chart looks a bit distorted but here's my progress so far. 

I was up like 26% or so at one point before the tariff crash and now I'm back down to 9.20%. I'm trying not to let it affect me and just focusing on the long term average as I will be going at this for about 20 - 25 years longer.

Despite having like 16.8% less return than before, my portfolio is literally at all time highs so I guess I should look at it that way right?

You should be cheering about the drop. It's great news for regular contributions and nothing to be disheartened about at all.  You want more drops.     

However, your investment behaviour is your greatest risk.   This is the mildest stockmarket crash in the last 30 or so years.   Yet you are concerned.     Stock market crashes occur around every 1 in 4/5 years.    So, none of this should surprise you when they happen.  If you react to them in the wrong way, you can create the real losses.

Why are drops great news for regular contributions? It may bring down your average price, but surely the likelihood that the price will get back to a previous high at X date in the future is less if it has dropped than if it hadn't dropped.  Can anyone explain the maths as to why people always say that drops are good....

masonic

Cus said:

dunstonh said:

SneakySpectator said:

I've been investing for 2 years now, I started off with £500 just to test the waters and then a lump sum and then pound cost averaged in each month, then did another lump sum recently during the tariff crash so the chart looks a bit distorted but here's my progress so far. 

I was up like 26% or so at one point before the tariff crash and now I'm back down to 9.20%. I'm trying not to let it affect me and just focusing on the long term average as I will be going at this for about 20 - 25 years longer.

Despite having like 16.8% less return than before, my portfolio is literally at all time highs so I guess I should look at it that way right?

You should be cheering about the drop. It's great news for regular contributions and nothing to be disheartened about at all.  You want more drops.     

However, your investment behaviour is your greatest risk.   This is the mildest stockmarket crash in the last 30 or so years.   Yet you are concerned.     Stock market crashes occur around every 1 in 4/5 years.    So, none of this should surprise you when they happen.  If you react to them in the wrong way, you can create the real losses.

Why are drops great news for regular contributions? It may bring down your average price, but surely the likelihood that the price will get back to a previous high at X date in the future is less if it has dropped than if it hadn't dropped.  Can anyone explain the maths as to why people always say that drops are good....

When you are regularly buying a thing, then discounts and sales are good, even in the final years. When you have accumulated a large store and switch to being a seller of that thing, then discounts and sales are bad. The short-term valuation of a market or index is not generally reflective of underlying fundamental value, rather sentiment and noise. The fact we have seen global equities rise 9% over essentially nothing, then fall 15% over the threat of something, then rise 8% when the threat was determined to be untenable, shows this. And in 2020, it fell over 20%, then in the months that followed rose almost 70%, only to fall 15% in the months that followed that. Sometimes it goes down and stays down for prolonged periods, or yo-yos. Which is why a 10+ year investment horizon is recommended when buying to avoid your holding period being overwhelmed by negative periods.

Cus

masonic said:

Cus said:

dunstonh said:

SneakySpectator said:

I've been investing for 2 years now, I started off with £500 just to test the waters and then a lump sum and then pound cost averaged in each month, then did another lump sum recently during the tariff crash so the chart looks a bit distorted but here's my progress so far. 

I was up like 26% or so at one point before the tariff crash and now I'm back down to 9.20%. I'm trying not to let it affect me and just focusing on the long term average as I will be going at this for about 20 - 25 years longer.

Despite having like 16.8% less return than before, my portfolio is literally at all time highs so I guess I should look at it that way right?

You should be cheering about the drop. It's great news for regular contributions and nothing to be disheartened about at all.  You want more drops.     

However, your investment behaviour is your greatest risk.   This is the mildest stockmarket crash in the last 30 or so years.   Yet you are concerned.     Stock market crashes occur around every 1 in 4/5 years.    So, none of this should surprise you when they happen.  If you react to them in the wrong way, you can create the real losses.

Why are drops great news for regular contributions? It may bring down your average price, but surely the likelihood that the price will get back to a previous high at X date in the future is less if it has dropped than if it hadn't dropped.  Can anyone explain the maths as to why people always say that drops are good....

When you are regularly buying a thing, then discounts and sales are good, even in the final years. When you have accumulated a large store and switch to being a seller of that thing, then discounts and sales are bad. The short-term valuation of a market or index is not generally reflective of underlying fundamental value, rather sentiment and noise. The fact we have seen global equities rise 9% over essentially nothing, then fall 15% over the threat of something, then rise 8% when the threat was determined to be untenable, shows this. And in 2020, it fell over 20%, then in the months that followed rose almost 70%, only to fall 15% in the months that followed that. Sometimes it goes down and stays down for prolonged periods, or yo-yos. Which is why a 10+ year investment horizon is recommended when buying to avoid your holding period being overwhelmed by negative periods.

Thanks for the reply but I'm looking for a mathematical explanation. From a maths perspective, if something falls 10% then the chances of it getting back to where it was is less than it if hadn't fallen (ie 1). Discounts and sales are only valid if you believe at that time that it is somehow below true market value and you are getting a deal, but others would say that the current value is the true value so you are not buying at discount, so why is it better to buy after a drop?

Maybe I should go on maths forum..

masonic

Cus said:

masonic said:

Cus said:

dunstonh said:

SneakySpectator said:

I've been investing for 2 years now, I started off with £500 just to test the waters and then a lump sum and then pound cost averaged in each month, then did another lump sum recently during the tariff crash so the chart looks a bit distorted but here's my progress so far. 

I was up like 26% or so at one point before the tariff crash and now I'm back down to 9.20%. I'm trying not to let it affect me and just focusing on the long term average as I will be going at this for about 20 - 25 years longer.

Despite having like 16.8% less return than before, my portfolio is literally at all time highs so I guess I should look at it that way right?

You should be cheering about the drop. It's great news for regular contributions and nothing to be disheartened about at all.  You want more drops.     

However, your investment behaviour is your greatest risk.   This is the mildest stockmarket crash in the last 30 or so years.   Yet you are concerned.     Stock market crashes occur around every 1 in 4/5 years.    So, none of this should surprise you when they happen.  If you react to them in the wrong way, you can create the real losses.

Why are drops great news for regular contributions? It may bring down your average price, but surely the likelihood that the price will get back to a previous high at X date in the future is less if it has dropped than if it hadn't dropped.  Can anyone explain the maths as to why people always say that drops are good....

When you are regularly buying a thing, then discounts and sales are good, even in the final years. When you have accumulated a large store and switch to being a seller of that thing, then discounts and sales are bad. The short-term valuation of a market or index is not generally reflective of underlying fundamental value, rather sentiment and noise. The fact we have seen global equities rise 9% over essentially nothing, then fall 15% over the threat of something, then rise 8% when the threat was determined to be untenable, shows this. And in 2020, it fell over 20%, then in the months that followed rose almost 70%, only to fall 15% in the months that followed that. Sometimes it goes down and stays down for prolonged periods, or yo-yos. Which is why a 10+ year investment horizon is recommended when buying to avoid your holding period being overwhelmed by negative periods.

Thanks for the reply but I'm looking for a mathematical explanation. From a maths perspective, if something falls 10% then the chances of it getting back to where it was is less than it if hadn't fallen (ie 1). Discounts and sales are only valid if you believe at that time that it is somehow below true market value and you are getting a deal, but others would say that the current value is the true value so you are not buying at discount, so why is it better to buy after a drop?

Maybe I should go on maths forum..

There is no mathematical explanation that will explain the price-discovery behaviour of market participants and it is impossible to determine a "true value". If such a mathematical explanation existed, it could be used to gain an edge and beat the market. You will not know if you are buying at a true discount, or just a less inflated price. You could try a psychology forum if you wish to learn more about market sentiment.

You can use historical returns data to determine the probability that a market or index will still be below its start point x years later. In the case that x = 25 years, that would be zero for an investment like the OP's global index tracker. In which case, if you are able to buy at less than the start price at any point during those 25 years you will be better off. The further it fell, the more it would have to subsequently rise. But does not account for market conditions that are unprecedented in history. So while it is a sound mathematical explanation, it may not survive contact with reality.

I do think you have your expectation of probability the wrong way round though. The greatest probability of a fall in value comes when the current market value is at its highest. Whereas the greatest upside potential comes after a significant fall. Which is why piling into the stockmarket when it is rising steeply or selling out when it is in free-fall is best avoided.

You will probably have heard of CAPE, the cyclically-adjusted price to earnings ratio, calculated by dividing the current price of a stock by the average earnings looking back over the previous 10 years. This can be applied to whole markets. In this valuation metric, the denominator moves slowly, so it is affected in the short term mainly by the numerator (price). There is a negative correlation between the logarithm of CAPE and the forward 10 year returns (although it only works about 50% of the time). When CAPE is high, future returns are generally low, and vice versa. CAPE falls very quickly during a stockmarket crash and it takes years for any reduced earnings to gain weight in the denominator. So crudely, this correlation explains the inverse relationship between price and future returns.

SneakySpectator

Cus said:

masonic said:

Cus said:

dunstonh said:

SneakySpectator said:

I've been investing for 2 years now, I started off with £500 just to test the waters and then a lump sum and then pound cost averaged in each month, then did another lump sum recently during the tariff crash so the chart looks a bit distorted but here's my progress so far. 

I was up like 26% or so at one point before the tariff crash and now I'm back down to 9.20%. I'm trying not to let it affect me and just focusing on the long term average as I will be going at this for about 20 - 25 years longer.

Despite having like 16.8% less return than before, my portfolio is literally at all time highs so I guess I should look at it that way right?

You should be cheering about the drop. It's great news for regular contributions and nothing to be disheartened about at all.  You want more drops.     

However, your investment behaviour is your greatest risk.   This is the mildest stockmarket crash in the last 30 or so years.   Yet you are concerned.     Stock market crashes occur around every 1 in 4/5 years.    So, none of this should surprise you when they happen.  If you react to them in the wrong way, you can create the real losses.

Why are drops great news for regular contributions? It may bring down your average price, but surely the likelihood that the price will get back to a previous high at X date in the future is less if it has dropped than if it hadn't dropped.  Can anyone explain the maths as to why people always say that drops are good....

When you are regularly buying a thing, then discounts and sales are good, even in the final years. When you have accumulated a large store and switch to being a seller of that thing, then discounts and sales are bad. The short-term valuation of a market or index is not generally reflective of underlying fundamental value, rather sentiment and noise. The fact we have seen global equities rise 9% over essentially nothing, then fall 15% over the threat of something, then rise 8% when the threat was determined to be untenable, shows this. And in 2020, it fell over 20%, then in the months that followed rose almost 70%, only to fall 15% in the months that followed that. Sometimes it goes down and stays down for prolonged periods, or yo-yos. Which is why a 10+ year investment horizon is recommended when buying to avoid your holding period being overwhelmed by negative periods.

Thanks for the reply but I'm looking for a mathematical explanation. From a maths perspective, if something falls 10% then the chances of it getting back to where it was is less than it if hadn't fallen (ie 1). Discounts and sales are only valid if you believe at that time that it is somehow below true market value and you are getting a deal, but others would say that the current value is the true value so you are not buying at discount, so why is it better to buy after a drop?

Maybe I should go on maths forum..

You don't need the market to go back to the peak to regain the money you put in previously. So let's say you buy at the top and dollar cost average all the way down. Well your break even point becomes the middle so your top half are under water, but your bottom half are in the green which compensates. 

Take the dotcom bubble which popped in 2000, if you didn't dollar cost average you would have broken even 7 years later at $156 (which was the previous top). But because you were buying on the way down, your break even is somewhere in the middle, around $114, at which point it would have only taken you about 4 years to recover. 

This can be even shorter if you load up and buy extra during bear markets. For example pick up extra shifts, maybe dip into your emergency fund a bit etc.

I think that's the most overlooked benefit of averaging into the market, it basically halves the duration of any bear market, assuming you keep buying each month. It won't be exactly half but it will dramatically decrease the duration. 

Just to demonstrate this on a shorter timescale, if you started buying at the peak of the recent tariff crash and kept buying, you'd actually be at break even already, or slightly up on your investment right now given that the mid point is somewhere around $104 and VWRP is currently $105.

Cus

Thanks again, I wasn't trying to understand the maths of behaviour, just probabilities of historic future returns based on starting points/stock price movements. Of course after 25 years it will be likely be higher than today, but but how much is surely impacted by the amount of falls, and the timing of those falls. It appears much more complex and that the often stated mantra of 'price drops are good if you are a regular buyer.' appears to me as a not mathematically proven based on historical data.

As for the probability wrong way round, interesting, as your comment suggests that piling in when the market is in freefall, or selling when the stock market is rising steeply could be seen as best not avoided.  That may sound daft, again, well known sayings need mthematical explanations otherwise they are just sayings to me.

Edit to add: I agree that continued regular investment is the best method, but I don't understand why one should be pleased that the price drops before you contribute, as that suggests you should be sad if prices rise before a contribution, which goes against the mantra of continuing investing is best.  All seems a bit fluffy