The Tortoise and the Hare, that timeless children’s tale, tells of the “slow but steady” tortoise winning a race against a fast but overconfident and complacent hare. When it comes to investing, I know who I’d rather be. The story is a useful analogy when looking at how we invest.
Losses versus gains
Many individuals are more tempted to invest a large lump sum
amount of money into the stock market at one particular point in
time. That nugget of wisdom that tells us to “buy low and sell
high” is such an obvious statement that it’s rendered moot – if
we’d all managed to pull it off and “time” the market then there
would never be any losers within stock investing.
But there are. Too many of us buy when the market is rising and, upon a market fall, we sell fearing further losses. Behavioural psychologists call this common investor trait “loss aversion” in that we prefer to avoid losses versus acquiring corresponding gains.
The conventional wisdom would be to wait for the stock/stock market to bounce back to recover those initial paper losses. Yet how many of us actually do that?
The answer to combat this common pitfall is to invest a set, but
small, amount every month into the stock market. Otherwise known
as “dollar-cost averaging” (DCA) it effectively provides a hedge
against market volatility.
This was a key tenet of the investment philosophy of Benjamin Graham, famed investor and mentor to the renowned Warren Buffett. Essentially, what this means is that you should be building your investment positions in the market over time.
Why? Because by putting your money into the market all at once, you risk buying at the wrong time. By employing DCA as a strategy, you can effectively omit emotions out of the investment process. My own experiences bear this out.
Hong Kong story
Back when I had graduated and just started working in Hong Kong in
2008, global markets were in the midst of a crumbling housing
market in the US.
Additionally, Hong Kong’s benchmark Hang Seng Index had seen an extraordinary run in 2007 that culminated in it reaching a record high (at the time) of just under 32,000 points in October of that year (see Figure 1).
Figure 1: Hong Kong’s Hang Seng Index 2004-2018
I had just started investing on a monthly basis shortly after, in
around April 2008 – partly because I had limited funds as a fresh
grad but also because markets were falling sharply around that
time. Trying to time the market when a large correction takes hold
is often compared to attempting to “catch a falling knife”.
In other words, it’s not advisable. And this proved to be the case for myself. I continued to invest a small amount every month throughout 2008 (which included the Lehman Brothers crash) and also in 2009.
The stock I was initially investing in at the time (and which I still do today) was BOC Hong Kong (HSI 2388), a large Hong Kong bank which had been well-shielded from the dud housing loans that American and European banks were exposed to. However, like the whole Hong Kong market, it got hit hard by the Lehman default in September 2008.
However, if you had invested a lump sum of money when the market was falling by 5, 6 or 7% on some days in wake of the Lehman collapse, you wouldn’t have caught the bottom. As it turned out global stock markets (including the likes of Hong Kong and the US) only bottomed out in March 2009.
This was also evident in individual market moves. For example, I was continuing to invest in BOC Hong Kong throughout these market falls, with its share price only reaching a low of HK$6.13 in March 2009. Today its share price stands at around HK$37.
As for the Hang Seng Index, it moved sideways (trading within a tight range) for much of 2010-2014 but reached a new all-time high in early 2018 before falling back to its current level.
However, throughout this whole period I was still investing into stocks every month and on the same day each month. Besides buying more when the price was falling, I also managed to ensure I wasn’t investing a lump sum of money at the exact wrong time.
Focus on the long term
So for long-term investors looking to grow their money over time,
ignoring the short-term noise and focusing on company fundamentals
by continuing to employ DCA will mean you can take the emotion out
Many of the biggest mistakes in investing can be traced to emotion and for those of venturing into new overseas markets, DCA can mitigate these issues. And always remember, the tortoise won the race in the end even though the hare was faster.
by Tim Phillips, English Editor @ FIGS
28 Sept 2018
(Please note that all views expressed in this article are solely my own and do not represent the opinions of FIGS or its related companies)
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