The trilogy of successful investing: Positioning

We believe that we are at the tail-end of this current bull market and we are staring at a slowdown that has a good probability of turning into a recession. What are the necessary ingredients to invest successfully at this stage of the investment cycle?

In this series of articles, we’d like to unveil these important ingredients for you – the three Ps.

The first P is Positioning.

 

Dollar-Cost Averaging

If you had invested every month since the Great Depression till now, you would have achieved a return of 9% per annum (inclusive of dividends)1. But how?

This appeared in the renowned classic “The Intelligent Investor” by Benjamin Graham, who’s Warren Buffett’s teacher:

“According to Ibbotson Associates, the leading financial research firm, if you had invested (a lump sum) of $12,000 in the Standard and Poor’s 500-stock index at the beginning of

September 1929, 10 years later you would had only $7,223 left. BUT if you had started with a paltry $100 and simply invested another $100 every single month, then by August 1939, your money would have grown to $15,571! That’s the power of disciplined buying – even in the face of the Great Depression and the worst bear market of all time.2

The figure above illustrates the magic of dollar-cost averaging in a more recent bear market.

In this case, a lump sum of $10,000 invested on 04/25/2008 would be worth less on 04/16/2010, representing a 14.5% decline.

However, if the dollar-cost averaging strategy was adopted, you would have ended the same two years 16.6% up. The shaded area represent the profits to the investors.

 

Positioning

Benjamin Graham describes this as “filling in the potholes” – this is effectively positioning your money on a monthly basis into the market to buy more, regardless of whether the market have gone up, down or sideways.

It is also the best way to invest if you fear a market crash.

“The concept is straightforward – you invest a fixed amount of money in an asset once every fixed time period. If the asset’s price drops, you will be getting more shares of the asset for the same amount of money, and so if and when the price recovers, you will have spent less per share, on average, than if you had bought the shares at their peak, pre-fall price.

Dollar-cost averaging isn’t about losing money as the stock market falls. It’s about buying increasing amounts of shares at cheaper prices, which means bigger returns during the rally.4

And it also works when you are investing for the long haul. It is obvious that returns would be much higher if you are able to perfectly time the market by buying in at the lowest point and selling at the highest point. However, no one can time that perfectly all the time. More often than not, investors tend to buy high trying to chase profits and sell low due to panic.

Thus, it pays to stay the course: buying in monthly as it gets cheaper and cheaper, and standing to gain when the rally comes.

 

References:

1-S&P 500 Dividend Reinvestment and Periodic Investment Calculator: https://dqydj.com/sp-500-dividend-reinvestment-and-periodic-investment-calculator/

2-Dollar-Cost Averaging investment strategy: https://dividendgeek.blogspot.com/2018/02/dollar-cost-averaging-lump-sum-investment.html

3-Benjamin Graham, The Intelligent Investor

4-Business Insider: Here’s The Best Way To Buy Stocks If You Fear A Market Crash

 

 

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