Spooked by ongoing sharp decline in value of investments - should I cut my losses?

seacaitch

@gladiolus
Over the longer term, investing (sensibly) nearly always delivers higher returns - often much, much higher - than saving in cash.

But… there is an entry price that must be paid in order to access these higher returns, and that is that you must be able to endure volatility along the way…

If you're investing sensibly for the longer term, and are diversified, and have taken the usual steps of having emergency fund cash set aside, then volatility in the nearer term is - or should be - totally irrelevant.

A 3% drawdown, a 10% drawdown, a 33% drawdown - none of these have much relevance to what your investment will be worth in, say, 10+ years time. If you're accumulating and are many years from retirement, then drawdowns are your friend and should be embraced.

If just a tiny 3% drawdown frightens you, then you're not really being rational about it. More likely, you're reading doom mongering news headlines and catastrophizing into believing your situation is far worse than the reality. That reality being a tiny drawdown on a lump of money you're probably not intending to spend for maybe a decade or more, i.e. a drawdown that's completely irrelevant to your investment horizon and therefore of no consequence.

For someone still accumulating, when assets become cheaper they should be feeling excitement not fear - excitement at buying assets more cheaply when others overreact and create firesales as they panic. You take advantage of this NOT by selling when 3% down, but by regularly investing on your pre-planned schedule (eg. monthly). You view the drawdown in an appropriate context, you keep the markets at arm's length, and you stay disciplined.

IF you can do that - and it's really not so hard since it's principally about DOING NOTHING and ignoring the news and the noise, then the (much) higher returns obtained from investing (vs. cash saving) are yours for the taking. Lots & lots of people manage to do this successfully, with no special talent, and they all began somewhere.

Your choice!

Cus

https://forums.moneysavingexpert.com/discussion/comment/81929907#Comment_81929907

That assumes that the chances of selling at X at some arbitrary date in the future is the same no matter that you bought at 90 today or 100 a week ago. If so then of course the bleeding obvious is that you have done better. I'm asking if the chances of the price being X at some arbitrary date in the future is the same for a product currently at 90 today rather than 100 a week ago.

Edit to add. If we can assume that on average all investments will rise by 10% a year over 30 years. Does that mean that the investment where a price has gone down by 10%, by buying after that price drop moment, will result in a slightly better 30 average annual rate of return than if the same investment had not dropped in price?

masonic

https://forums.moneysavingexpert.com/discussion/comment/81929924#Comment_81929924

It was 100 a week ago and 90 today. It is the same investment. If it is an OEIC that is priced once a day for example, all investors who sold on a specific date, let's say a week today, whether they bought a week ago at 100 or 90 today would get the same disposal price.

Cus

https://forums.moneysavingexpert.com/discussion/comment/81929934#Comment_81929934

Agreed. Does that mean that it's better to buy units now because the price has dropped as has been suggested on this thread?

Woodstok2000

I think you're misunderstanding me, or more likely I'm not explaining myself very well! I'm not talking about the chances of a price rise, I'm talking about the benefit when that price rise happens. Obviously price rises are never guaranteed, but long term in a diversified fund you will almost always see an increase.

So given that, in a situation where you have already decided to invest, is a lower price better?

To give a real life example, I bought 1000 units of a vanguard global fund in Jan 2021. Covid hit and the price dropped by almost 20%. I believed in the investment, and I also believe that the global stock market downturn due to covid did not indicate any underlying systemic decline in long term stock market returns. Therefore I invested the same amount again, and was able to buy 20% more units.

Since then, the fund has almost doubled in value, and I will get a much higher return from the second purchase than the first one even though I invested the same amount in the same fund

masonic

https://forums.moneysavingexpert.com/discussion/comment/81929937#Comment_81929937

It makes it better to buy units now than it was last week, because the price is lower now than it was last week. Did anyone suggest it was better to buy units now rather than in the future? Because that clearly cannot be said. If someone did say that, I missed it.

Cus

I understand your thinking. You saw an opportunity that a global fund was in your opinion undervalued, bought more at a lower price, and it paid off. My question is whether that is statistically more likely DUE to the price drop than not. You thought it was undervalued, the market at that moment didn't, as at that moment that was the price the market thought the fund was worth was the market price.

Are you saying that you knew better than the market value opinion at that moment? If that fund gained by 100%, was it therefore more likely that it would rise by 100% from that moment in time than if it hadn't dropped in price by 20%?

Edit to add: I'm truly interested in the statistics of the idea that it is better to buy more when the price has dropped. Appreciate the conversation and I am not trying to argue

Cus

https://forums.moneysavingexpert.com/discussion/comment/81929940#Comment_81929940

Its only better to buy units now rather than last week if you believe that the price will % rise more from the lower price than it would have done if the price has stayed the same no?

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/81929956#Comment_81929956

That's a mathematical certainty (or at least, fall less far). The same asset will have the same value at your sell date, so profit/loss is directly a function of the buying price.

Linton

https://forums.moneysavingexpert.com/discussion/comment/81929914#Comment_81929914

The OP bought a global index fund. Whilst the global economy exists in its present form prices overall must generally rise over time since the underlying companies must continue generating profits at a rate above that obtainable from safe bonds if they wish to get the money they need to continue in existance.

For the world market to reach a maximum which it never exceeded would imply the collapse of the world economy as we know it. In such circumstances your saved wealth in almost any form would be irrelevent anyway.

I believe market falls after external global events arent the result of the general investing community somehow collectively agreeing a price should be lower than it was but rather that people who want to invest delay doing so whilst circumstances are unclear. With fewer buyers supply and demand will ensure prices fall as there are always forced sellers. Bearing in mind that we are talking about a global index fund how do traders in individual shares come to an agreement about what its price should be? They have no control over it.