To Invest or Not to Invest – In the Times of Coronavirus

Investing, Strategy / Wednesday, April 1st, 2020

As the stock exchanges continue their up and down swings, breaking records whichever direction they decide to move in on any given day, we can safely conclude that coronavirus (COVID-19) has the markets up against the wall. Just like us humans. So lately, the dilemma for any beginner investor such as ourselves has been as old as Shakespeare himself. To invest or not to invest in the times of Coronavirus?! 

So should we continue to trust the conventional wisdom of Dollar Cost Averaging (DCA) or should we wait for the markets to bottom out (or maybe just settle down)? Both of these philosophies have some merits and some negatives. But in keeping with the times, let’s look at the negative side of things.

Dollar Cost Average vs Lump Sum Investing

Against DCA is a quote by John Maynard Keynes “In the long run we are all dead”. You Only Live Once (YOLO) in millennial speak. Keynes was a prolific economist and investor. When the stock markets crashed in 1929, instead of relying on DCA, he devoured as many undervalued stocks as he could lay his hands on. And then once the stock prices rose again, he generated a handsome profit.

Many-a-investor has advised against timing the market. Here’s what Benjamin Graham, widely known as the ‘father of value investing, has said, “In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.” That’s true, but that doesn’t really stop any of us from predicting the future. Not even knowing the fact that we would almost certainly be wrong! 

Ever since the Coronavirus crash, we’ve been struggling with both these philosophies on a daily basis. When we see the markets go down by 5%+, we start wondering if this is the bottom, if we’re missing out and should be investing. We then see it going back up 5%+ and think we missed the bus, only to repeat the cycle.

To compound our situation we started investing at the recent highest highs of the markets when everyone was calling for a recession because of a number of reasons but mostly because “it was time”. We have seen our portfolio fall quite a bit in a very short time period, which is a wee bit scary.

Amongst all these fears, we’ve found it helpful to go back to the basics. We’ve been reinforcing the investing principles of FIRE to clear our head and to keep our motivations high (or as high as is possible under the existing circumstances).

FIRE Preaches “Disciplined Low-Cost Investing”

And, it also helps to have some empirical evidence to back up these beliefs. We thought of doing a small test of DCA vs Lump Sum investing (i.e. if we had tried to time the market). To make the test more relevant to the current market situation, we’ve considered a window of 4 weeks over Mar ‘20, when volatility has been at its highest.

In the first scenario, we tried to simulate the DCA methodology. We assumed an investment of around $2,000 every tuesday for 4 weeks between 2nd Mar – 27th Mar 2020. The scenario provided a return of -6.06%.This is quite similar to our regular investing cadence. 

Next we looked at the case of investing the sum of ~$8,000, on the day when the market had its first big fall. On 9th Mar 2020, ASX 200 lost 7.6%. The worst date of trade since Oct 2008 (Global Financial Crisis). In such a scenario we would have been down -8.86%. 

The thing with numbers is, the storyteller can choose what suits their narrative. Here we have taken these dates, maybe some other combination will tell a different story, but hey, confirmation bias! 

In reality, it’s extremely difficult to decide when a lump sum investment should be made. Because sharp decreases in the markets have been far and few for the past many years, the general tendency has been to assume that the markets would only go up after a big fall. Which is exactly what Gerry Harvey, the retail magnate behind Harvey Norman, did when trying to beat the plunging market. 

Dollar Cost Averaging (DCA) the stable option

There is no point in timing the markets, trying to do something that nobody before us, irrespective of how capable they have been, has been able to do. 

With DCA, even though we would not be able to take full advantage of the extremely high volatility, however we would be assured of not missing out, just waiting for the bottom to hit.

Mr. Fireball

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