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Spooked by ongoing sharp decline in value of investments - should I cut my losses?
Comments
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I suppose one could invoke the butterfly effect. The £100 I delay putting into the fund for a week could have effects that ripple out into the wider economy and materially change world events.
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No, I don't think you can assume "editing out" a transitory drop in price would turn a neutral fluctuation into a net increase. Most likely the result would be a smooth ride. This could, however, cause the "dip-buyer" not to buy and therefore be out of the market for whatever comes next.
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Of course, this is obvious to both of us. My question is the statistical likelihood of the price on the 26th march being what it will be is impacted in any way by the price movements on 12th and 19th.
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In other words, the price on the 26th march will be the same despite a drop in price on 19th compared to 12th. To me that doesn't make sense. If the price on the 19th was 90% lower than the 12th, can we still believe that the price in the future on the 26th is not impacted?
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I see - but surely you are buying shares in a company because you believe the amount you pay for them is worth the value of the share in the company? That being the case, the same share in the company should be even more attractive now you get it on sale?
Unless your reason for buying it is because it's more expensive? I guess some brands are only attractive because of their cost, but I haven't ever seen that with share price before.
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Put it another way, if we assume that over the next 10 years from today the average annual increase in a fund is likely to be 10%, then if tomorrow the fund price drops 90%, do we still believe it will average 10% over the next 10 years from today, or from tomorrow?
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The price on the 12th and the price on the 19th are known facts from the 19th onward, so their effect on the price on the 26th (whatever that effect may be) is baked in. If those two prices were transposed, or different in any way, then the price on the 26th could differ too. But it will be what it will be for each possible pair of prices on 12th and 19th, with the gain or loss forming the same mathematical relationship based on the relevant acquisition price.
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If nothing else has changed, then if you believed it was going to increase 10% at full price, you should believe it's now going to increase at something like 39%
(edit with corrected maths)
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Aha, I think this makes it clear to me how you are thinking. Your best prediction of the future price may quite rightly change in this scenario. And the actual return could well differ from the hypothetical scenario where the things that caused the price drop didn't happen. But it doesn't change the rank order actual returns from investing this week vs last. It may, however, influence your decision whether or not to invest at all, which could be either better or worse for your outcome.
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My belief is irrelevant. I'd like to know if the historical facts show statistically whether the possible 39% approx rise from the lowered price matches matches on average the 10% rise from full price at least a quarter of the time. I suspect that the chances it goes up 10% from the full price is the same as it going up 10% from the lowered price, hence the idea that buying units when prices drop is better is wrong.
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