During periods of volatility, a lot of thoughts have been going through my mind and I think about how should I be positioning my portfolio and buys. In the end, doing nothing and automating your buys might turn out to be best decision because moving/selling the funds incur fees and doing lump sum investing can make you run out of funds when a lower low appears.
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Of course, I was not able to time the bottom and did not buy in at the exact bottom but I have been DCA-ing very month. Even though I wished that I had bought more during the bottom, my portfolio has recovered substantially from it’s lows. Especially with Tesla as the upcoming stock split and Q2 results propping the stock price.
Not doing anything is best if you have no plan but if you have a plan, stick to it.
There are investors who are able to make use of the market downturn to grow their portfolio, some do it by selling their current holdings and buying it back at a lower price when it drops. Others short the market, there are definitely many methods to increase your portfolio but if you do not have a plan that you can follow, doing nothing and continuing your DCA-ing is the best.
Why doing nothing to your portfolio might be the best strategy in a volatile market?
I am sure there are many articles that write about why and I am going to also reiterate them here.
- Emotions can lead you to make rash decisions
When we see the market going up and down, we tend to be anxious when there is a substantial dip and making decisions when you are feeling irrational is not always good. You might be in a loss and you can decide to hold if you understand how the market cycles are however if you are irrational and realise your loss, the losses are there and going back in might require more effort.
Once you realise your losses or make decisions based on your emotions, you might regret it in the long term when the market recovers. Also, there are times when taking the time off your portfolio is important as you know you can be affected by emotions. Hence we do see that during a bear market, there is a lot less discussions or post on social media as some individuals do choose to take a break and stay away from the numbers.
- Time in the market beats timing the market
Continuing from the above point, if the market drops and your emotions makes you sell off your position due to rash decisions, then your positions are not in the market which means you are trying to time the market.
In recent times, the market seems so sensitive and everything seems to affect it so sitting still seems tough. I have to admit that it is also affecting me as I see my portfolio hitting a steady high and suddenly a news/data can cause my portfolio value to drop substantially. So then, accumulating is the best I can do. For stocks, I am mainly accumulating QQQ and for crypto ETH. I don’t have a huge monthly amount to work with so building it up before venturing into others and I learned this hard with my experience on LUNA/UST. I will not over accumulate a certain stock or crypto in my portfolio and remember to take profits.
In times of volatility, DCA-ing and building up your portfolio is the way
No matter what happens, we know that the market works in cycles and if you do not have a lump sum with you to grow and to buy the bottom, then dollar cost averaging is the best. Making sure you are investing through the ups and downs and staying invested as well.
2022 has got to be one of the rollercoaster year for me ever since I started investing in 2017 and looking ahead to see how the next few years span out. In the meantime, catching the last episode of Extraordinary Ordinary Attorney Woo-young-woo.
Reference: https://www.fidelity.com.sg/beginners/what-is-volatility/volatile-times
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Hi There,
ReplyDeleteInvesting is a journey, just like our lives. There will be ups and downs. And after each cycle, we hope to grow stronger and richer (both in terms of experience & wealth!)
How to keep our emotions in check during stock markets crashes?
One way is to NOT invest at all. I have colleagues who fear investing in stocks and thus have not invested in stocks. And they are thus not affected by market crashes at all. They focussed on buying a big home and as we know, property owners are seeing obscene capital appreciation currently.
The second way is to limit your exposure to the stock market. If you have only $100,000 invested, a 50% drop is only a loss of $50,000. Many will be able to take this in their strides. But when your invested capital is over a $1M, even a 30% drop is at least $300,000 loss. This can take years to rebuild. But if we invest little, we must also expect our gains to be little, although our loss will also be little.
So what can a person do?
This is what I do. First I diversify. Diversification into different investment instruments mitigate the risks of "single point" failure, and hopefully ensures that not all your investment will go down together, or better that some will even go up when others are down. Like property is riding high now while stocks are down.
Secondly, I ensure I have substantial savings somewhere safe. In S'pore, we are fortunate to have the CPF. I continue to bulk up my CPF savings as much as I am allowed to. A substantial savings in the CPF provides the best emotion stabiliser when the stock market is in turmoil.
Thirdly I invest for dividend income. Receiving dividends provides one a sense that you are receiving returns regularly. Returns that are real & useable.
So just to sum up, here's what my wife & I derived from our "diversified" investmentfrom Jan to Aug (YTD 2022):
1. Dividends from stocks : $73,000
2. Rental : $25,000
3. Interest from CPF (estimated) : $74,000
It took us many years to come to this stage. We are not risk takers. Just continuous investment and reivesting our passive income.
Good luck.
Hi mysecretinvestment, nice breakdown on your diversified investments and pretty impressive amounts! Yes, the drop can scared people especially if their portfolios are substantial. Thanks for sharing your experience and appreciate your comment:)
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