What happened in the stock market 2019 to 2022

What happened in the stock market 2019 to 2022?

by with One Comment General EconomyInvestment AccumulationSpeculation
What happened in the stock market 2019 to 2022
What happened in the stock market 2019 to 2022?

If you are reading this, you might be deeply hurt by the stock market from 2019 to 2022. I feel you. The last 4 years could have been the most profound shift in the financial market ever. In this article, I will explain what happened to the stock market from 2019 to 2022. In the conclusion, I will attempt to forecast what may happen beyond 2023.

Disclaimer: This is by no means a buy/sell/hold recommendation. Personally, I will write what make sense to me at this moment of time. Read with caution. This is a highly simplistic article and I will explain using demand and supply which are the basic market forces that move prices.

The “Beginning”

COVID-19 was first identified in Wuhan, China in Dec 2019. The World Health Organization (WHO) declared public health concern in 30 Jan 2020 and later a pandemic on 11 March 2020. Province lockdowns soon became a global lockdown in the coming month.

In the last 50 years, the world has become a “smaller” world due to globalisation. It is now much easier to obtain goods, services and even labour across continents. As a result, some countries who have more resources (food, raw materials, land) can sell those countries that have less. In an utopian world, resources are used more efficiently.

In a way, the fate of every country in the world are now intertwined with each other.

The closure of China, being the 2nd biggest economy has impacted the world by reducing the  global supply. The illustration below show the top exports that China sells and the potential impacts on the destination countries.

What happened in the stock market 2019 to 2022 China Importance
What happened in the stock market 2019 to 2022 China Importance
What happened in the stock market 2019 to 2022 China Exports Destination
What happened in the stock market 2019 to 2022 China Exports Destination

The “Flawed” Gameplan?

As the world started to shut their doors, the FED in an attempt to save the economy blew the dust off their previous gameplan during the financial crisis of 2007 to 2009. Though it felt like a decade ago, on 15 March 2020 the Federal Reserve announced it is dropping its benchmark interest rate to zero and launching a new round of quantitative easing (QE).

What happened in the stock market 2019 to 2022 Fed Rates
What happened in the stock market 2019 to 2022 Fed Rates

For QE to happen, the central banks buy bonds (typically government) and other assets. Thus, it injects money supply into the economy. This adverted the previous credit crunch in 2007 to 2009.

I believe that COVID-19 was however not a credit crisis. However, as there are now more liquidity in the market. More money are now chasing the same (probably lesser) amount of goods. This increased the demand for goods and services.

The WFH Trend

What happened in the stock market 2019 to 2022 Work From Home
What happened in the stock market 2019 to 2022 Work From Home

COVID-19 brought many changes in our lives and one of them was working from home (WFH). While retail and restaurants were badly affected, the technology sector thrived as we are more reliant on technology to conduct our meetings.

Share prices of companies such as Zoom, Microsoft, Salesforce, Netflix roared upwards. As their business boomed, the demand for labour in this sector increased. As a result, wages increase. This increases the disposable income to buy even more goods and services.

Inflation Woes

This trinity of events in my view, created inflation. With China lockdown (lower supply), increase in money supply and wages (higher demand), this pushed the prices of goods and services upwards.

To add fuel into fire, the Russia-Ukraine crisis put even more pressure the global economy.

What was believed to be a transitionary inflation became a persistent one. While we are seeing some slow down in inflation today, it is way higher than Pre COVID-19 inflation rate of 2%.


source: tradingeconomics.com

The Pivot

To tame inflation, the FED began their series of aggressive interest rates hikes from March 17, 2022. This is done to create some price stability in the market. While I believe the COVID-19 crisis was more of a supply issue, the FED could only influence the market through demand side solutions.

When interest rates increase, this makes borrowing more difficult. As a result, business may spend lesser and this may cool the market. We are starting to the effects of this as news of hiring freeze began to surface.

This spooked the stock market sending share prices of many technology companies tumbling to their 52 weeks low.

What happened in the stock market 2019 to 2022 Taming Inflation

What happened in the stock market 2019 to 2022 Taming Inflation

What’s coming in 2023?

So, what’s next? The following section will be my prediction of the market. Please read with caution.

I believe things will become better in 2023. This is because supply chain will be easing. I believe the lockdown impacted supply chain as China is the “manufacturing factory of the world”. The world will be “reunited” again after 8 Jan 2023 as China finally open their doors to the world. At the same time, Chinese tourist will once again roam the world with pent up spending. I believe this inflation will be transitionary while supply chain eases up.

While manpower in the technology sector are still on freeze, I’m seeing more demand for manpower in the retail and restaurant space. As this sector struggles to find workers, this will push wages up. In a way, we might see improvements in income inequality. I believe this wage increase is healthy.

Hence, I believe Inflation will stay for a while. This will in turn mean that interest rates will be hovering around current levels. This will then depress stock valuation of companies.

What happened in the stock market 2019 to 2022 Moving Forward
What happened in the stock market 2019 to 2022 Moving Forward

Howard Marks from Oaktrees communicate this best in his recent memo. While we were blessed with low interest for the last 40 years, we should look forward to a more “normal” interest environment in the years ahead.

In today context, we are preparing more for a slowdown or soft landing. As the credit window is more constricted now, it is important to build up capital fast for any opportunity.

 

Final Thoughts

Congratulations for making it thus far. I don’t think it was easy to invest in this environment. It was certainly a 180 degrees pivot from 2020 to 2021. Nevertheless, it is more important to be educated in investment. I believe the window of opportunity is opening.

Like what Howard Mark says, a sea change is coming. Are you prepared?

I wish you all the best. Take care!

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

 

Bear Market Survival Tips

Bear Market Survival Tips

by with 4 Comments Investment AccumulationMoney ManagementMoney MindsetPersonal FinanceSelf Directed InvestingSpeculation

I was hoping never to write this article because if you are here reading this, it could only means a few things.

  • We are in a bear market
  • You are in a long position with a possibility of being overleveraging
  • You don’t have a system that prepares you for this scenario

Whatever the reason you are here, I think it is quite certain that we are experience a market that is downward cha-cha.

Disclaimer: It is anybody’s guess where the market is going to be. This should not be taken as a buy/sell/hold recommendation. Please consider your own context or approach a financial advisor for advise.

Bear Market Survival Tips
Bear Market Survival Tips

Despite the fear, bear markets are nothing new. To put everyone on the same page, a bear market occurs when major stock indexes like the S&P 500 fall 20% or more from their most recent peak. They’ve occurred 12 times since 1946, which is on average once every 8 years. Most pullbacks above 20% have been associated with recessions. Hence, with the perfect long storm, politicians all over the world are most concerned about recessions.

On average, a bear market is around 9.5months. This would mean most of us will live to tell the tale assuming we are not shaken out of our position (mentally or by margin calls).

As I get more and more about how to invest in a bear market, I hope this article will be able to share with you some bear market survival tips to prepare yourself for the weeks to come.

Bear market survival tips

#1: Avoid making impulsive decisions

This makes the top of the list. Emotionally, people don’t like to be wrong (whether temporary or in the long run). Hence, when they see their portfolio in the red, many people have the temptation to “reset” their portfolio. This is detrimental to your wealth management journey and it is just a “quick fix” of escaping the mental strain.

Stay calm is the key in bear and highly volatile markets. If your time horizon is decades away, the best thing to do is to invest as if nothing has changed. Let me give you an example of a $1000 investment in the S&P 500 between 1/1/2009 and 12/31/2018 (the last market crash).

  • If you stayed invested the entire time, you’d have $2,775.
  • If you missed the 10 best-performing days during that period, your account value would be $1,722.
  • If you missed the 30 best-performing days in this 10-year period, you’d be left with $918.

I can’t emphasize how important it is to stay invested.

#2: Build your positions regularly over time

With dollar-cost-averaging (DCA), no thinking is really required. However, I recognized that it may not be easy. I saw friends who were excited about the recent bear market and have dollar cost average down the last few months.

However, they are all now NOT adding into new positions as the market is still going down. DCA is somewhat easy to say but not easy to execute consistently unless there is a system that is set up. Personally, I have averaged down on the China Market previously and it is still a bleeding position (Check out my latest SRS positions).

Time will tell. That being said, stay tune for my upcoming article: The pros and cons of dollar cost averaging.

#3: Change your strategy, diversify or play defensive

As a wealth manager, I realized risk management is something that I constantly address. If you’re still active in the markets and it is not working anymore, it might be time go passive with a lazy portfolio. If you find yourself taking too much risk, you might want to seek a more defensive portfolio.

Your current life stage might not allow you to take too much risk as compared to before. It is vital to re-assess your situation, your goals, your risk tolerance and discuss with a professional on your options.

#4: Go contrarian (Not recommended)

If you are a trader, you know better than to go against the trend. Consider taking a buy put options position to bet against a stock or ETF, this allows you to have a limited downside (as you are a buyer of the put option) and able to participate in the downward trending market.

WARNING: I have to emphasize that buying options is speculative. They may expire and be worthless if you do not have a game plan. If you are wondering what this is, do not do it. 

Final Thoughts

Stay strong. This may be the pivoting moment in your investment journey. There are so many resources you can turn to nowadays to prepare for a bear market. You can consider what Warren Buffett is doing amidst the noises.

Definitely reach out if you need help. I will be more than happy to have a conversation with you.

Otherwise, please watch out for my next article: The Pros and Cons of Dollar Cost Averaging. [Update: The article is out!]

 

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

The 2021 Madness. What's Next

The 2021 Madness. What’s Next?

by with 3 Comments Personal FinanceReflection
The 2021 Madness. What's Next
The 2021 Madness. What’s Next

The past 2 years have been madness. I believe you saw how COVID-19 took the world by storm. Your company might have been left paralyzed, our governments scrambled and ordinary people that you know became separated from their loved ones.

Just as we think that things are becoming more stable, Omicron emerged. When will this ever end?

First thing first, for readers following Wealthdojo, I would like to thank you for all the support you have given by sharing my articles. It is really a pleasure.

As you know, it is a yearly tradition to write a reflection of the year so that we don’t miss the lessons we learnt (Read More: 2019 Reflection. 2020 Reflection). In this annual 2021’s reflection, I have a new epiphany.

What if things never really ends and these will continue forever?

History In Context

100 Years Of History And The Stock Market
100 Years Of History And The Stock Market

In the last 100 years, things were crazy. If you travel through time to the 1900s and tell someone that you can find all the information in the world in a 6 inch metal piece (smartphone), they will think that you are crazy.

Do you know what else is crazy? Imagine all of these happening just in the last 100 years.

  • 1.3 million Americans died while fighting nine major wars.
  • Four U.S. presidents were assassinated.
  • 675,000 Americans died in a single year from a flu pandemic (This wasn’t even COVID 19. 777,000 and counting died because of COVID-19)
  • 30 separate natural disasters killed at least 400 Americans each
  • 33 recessions lasted a cumulative 48 years.
  • The stock market fell more than 10% from a recent high at least 97 times.
  • Stocks lost a third of their value at least 12 times.
  • Annual inflation exceeded 7% in 20 separate years.

Every single time when we thought things are crazy, we bounced back as a human race to be where we are now. I believe things will be crazier from now on. (Maybe the Metaverse isn’t that crazy after all. More on the Metaverse in the points below.)

The Crazy Things That Happened in 2021

Let’s start with my pet peeve. Over 35% of all the American dollars ever printed by the U.S. government has been printed in 2020! These American dollars are given out for people like shopping vouchers. I cannot imagine how inflation will be like in the near future. This has raised food prices and (unintended so they say) impacted countries like Egypt, Libya, Syria, and Yemen where people are rioting in the streets for having nothing to eat.

We also saw terrible companies’ stock soar insanely high. Companies such as Gamestop (GME), AMC saw great gains. The worse part of it all is that I see speculators trying to rationalize those buys.

One of the biggest property developer in China, Evergrande is on the verge of collapse.

HDB is being sold for millions. Good Class Bungalows are being snapped up like hotcakes in Singapore.

NFT are now sold for millions with the current record of $69 million. Did I mentioned cryptocurrency already? Anyway, here’s the NFT that was sold.

Christies NFT Auction 69 Million
Christies NFT Auction 69 Million

Investing in 2021 is like going to NTUC before PM Lee gives his speech. There will be lot of people buying, stocking up on toilet paper and cup noodles. There will be fair share of people taking photos or videos of situations. It is funny, exciting and everyone will have a story to tell.

Please enjoy my reflections as I reflect on the 2021.

No One Gives a Damn About Long Term Investing Anymore

If they are, they are probably very seasoned investors or part of a Long Term Investing community.

It is not easy being a self directed long term investor. We live in a world of instant gratification. If you want food, just hit the Grab App and you will get it in 30 minutes. If you want a dress, just hit the Shopee App and you will get it in 2 to 3 days. If our internet connection is down for 15 mins, we behave like the world is over. In a world where things comes so easily, the virtue of patience becomes very hard.

The stock market is one where we see unique individuals. Some people treat it as a place to buy high quality companies. Others might treat it like a platform to instantly change their lives by putting all their savings in one company/coin. I don’t think there is right or wrong to this. I just wonder if they do get their intended results.

Social media changed the stock market completely. 🚀🚀🚀. Everyday, we are going to the moon. HODL. 🚀🚀🚀. It almost makes investing looks like it is easy money until it is not. Corrections happen and people suddenly becomes a “long term investor” again. Well.. at least until the correction is over.

AMC TO THE MOON
AMC TO THE MOON: I wonder how this Youtuber is doing now.

I find it so difficult to talk about investing now when their expectation is getting multi-baggers in the next few weeks. If it is not 100%, don’t even bother.

I wonder if people will be ever satisfied by buying and holding quality companies anymore. That being said, my own investment thesis is still investing and holding on to the quality companies in the long run.

Burn Outs Are Real

Do you remember holidays? Holidays are mostly overseas trips requiring you to pay buckets loads of money for you to take a photo over a scenic location. (Kinda look like this).

Burn Outs Are Real
Burn Outs Are Real

Jokes aside, I noticed the lack of holidays causing burns outs among my friends. Doctors, healthcare workers, teachers and people from all walks of lives are reported to have face anxiety, depression and burn outs in the pandemic. It is so hard to walk away from our work now and worse still, we can’t even go for a holiday.

I always thought that holidays were a temporary reset that we need in a driven society. There is always an email that you need to reply. There is always a whatsapp work group chat that you need to give attention to. You are constantly engaged. Although holidays are temporary relief much like Panadol, you might feel that at least it gives you the opportunity to disengage yourself from work and enjoy that moment.

*Important* If you find yourself constantly feeling helpless or trapped, having an increasing cynical outlook of life or lacking motivation, back pains, shoulder aches, gaining those extra pounds around your belly, those might be signs that you are experiencing a burn out. You might need some help. 

I’m not suggesting that I’m an expert to help with burn outs. Pandemic or not, I believe it is very important to take breaks or just a time to do nothing. I can tell you that it is not easy to do nothing. We have NOTHING in our culture that focuses on doing NOTHING. I grow up learning that I should not waste time and I was punished for wasting time.

Took me 5 years to learn that relaxing is not wasting time. This is so important that I’m going to bold and type this sentence again. RELAXING IS NOT A WASTE OF TIME.

Burn outs are real. Take breaks.

The Common Man Behaves Like Experts

Put a smart phone in the hands of ordinary man and they behave like experts. In my university days, I learnt about Bunning-Kruger Effect in Behavior Economics. Dunning-Kruger effect is generally reported as an irrational tendency among certain incompetent individuals systematically to overestimate their true level of competence.

Dunning-Kruger effect
Dunning-Kruger effect

An obvious example is ordinary man or woman becoming “experts” in vaccines overnight and being able to share certain theories. For companies like Moderna who aren’t even sure if their vaccines will work on the Omicron without new data, how can the common man be so sure?

I struggle with this a lot. It seems like everyone thinks there is a conspiracy theory everywhere and they are very convinced about their own theory. The trust in the government is tested regularly with every strain or every spike in COVID-19 cases. Though I feel annoyed when there are heighten restrictions on dining, I believe we are doing all we can to get through this.

Thinking deeply, I believe the struggle of this generation will be to find the right information. We have an overload of information and it is our duty to sleeve through all the noises. I see this in investment as well. There is probably someone you know who talks about Bitcoin and may be earning money if you know what you are doing.

For me, I placed high importance in finding places with right information.

Be Open Minded AND Keep your Eyes Open

I would like to finish off with this statement. I can’t help but feel that the world is constantly changing. Something that might have worked 5 years ago might be obsolete now.

Floppy discs, CDs, DVDs, MP3 players, the pager, overhead projectors, fax machine are just some technologies that once took the world by storm and are obsolete today. The world is changing and so should our minds.

Be open minded.

Be Open Minded
Be Open Minded

I’m currently learning about everything related to the Metaverse and recording them here. You can follow the page if you wish to be updated. I believe that this is an emerging trend and we are still early in the adoption of the technology.

It is also important to keep our eyes open. With the new shiny object in the room, there will be new scams, new rug pulls (I just learnt this term) and new ways to be cheated. Open your eyes and move. There is no guarantee that we will not be hurt but it is important to keep moving.

Final Thoughts

This is probably my last article for the year. Wishing all of you good health and may fortune favor the brave.

What about your reflections in 2021? Let me know in the comment below.

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

Why is it not easy to invest in the long run

Why is it not easy to invest in the long run?

by with 2 Comments Investment AccumulationMoney ManagementMoney MindsetSpeculation

In the most recent webinar that I conducted, I asked the participants what are they concerned about when it comes to investing in the long run?

I thought that most people’s answer would the lack of time or the inexperience in the market. It turns out that for most people, they are not too sure if they are doing it right.

Why is it not easy to invest in the long run
Why is it not easy to invest in the long run

If you think about it using a proxy, it is like a person driving on the roads but unsure if they driving properly. If this is not risky, I don’t know what is.

The Why

Fear Of Missing Out FOMO
Fear Of Missing Out FOMO

As we get more plugged into the internet, social news gets spread very quickly. With more people getting stuck at home during the COVID-19 period, we log in more to these social platforms to keep updated on the world around us.

One popular topic is how people are getting rich during the pandemic. Topics like Bitcoin, NFTs, Value Investing or Growth Investing gets thrown around. Because it seems that every Tom, Dick and Harry is doing it, people fear missing out and started participating into these.

Redefine Basics

Investing is the act of allocating resources (usually money) to buy an asset, in hopes of reselling it later at a higher price (Definition from Investopedia).

For most people, they get the concept that they will make money when the price goes up. I believe there is a certain form of Social Investing (a term that I just made up) going around in the recent market. Reddit has made certain stocks like Gamestop pop. Elon Musk has certainly contributed to the popularity of Bitcoin and Tesla. One thing for sure is that prices seems to be influenced by social pressures.

While it has created some millionaires, some people are unsure what they are doing anymore.

The art of investing starts from buying an asset. This concept seems to have lost its’ way in this season.

Our Mind Plays Tricks

Let’s play a game. Find a place to record your answer for Quiz A and B.

Quiz A

Choice #1: You get a 100% chance of getting $50.

Choice #2: You get a 50% chance of getting $100, 50% chance of getting $0.

Write down which one will you choose?

Quiz B

Choice #1: You get a 100% chance of losing $50.

Choice #2: You get a 50% chance of losing $100, 50% chance of losing $0.

In a 1979 experiment by Daniel Kahneman and Amos Tversky, it is discovered that most people choose Choice #1 for Quiz A and Choice #2 for Quiz B.

However, if you understand it mathematically, you should be indifferent between all the 2 choices in Quiz A or Quiz B. The expected value of both Choices in Quiz A are the same (i.e. +$50), while the expected value of both Choices in Quiz B are the same (i.e. -$50), so there should be no difference (at least mathematically) between the Choices in either Quiz. (Thank you Kok Ming for your help)

This tells us that as humans, we feel losses more keenly than gains (loss aversion). That’s probably the reason why you might have taken gains off the table early out of fear and hold onto large losing positions in the hope that they will rebound.

Our minds are not wired to maximise performance but to minimize regret.

Anyway, that’s just one problem. These are other cognitive bias we need to overcome as investors.

Cognitive Bias Investing
Cognitive Bias Investing

So What Can You Do?

Now that you understand that the society and your own mind is against you, what can you do? I would humbly like to suggest 3 steps.

#1: Get financially educated and informed of the investment process.

#2: Focus on the controllable.

#3: Consider a multi asset class portfolio to minimise drawdown.

Why is it not easy to invest in the long run education
Why is it not easy to invest in the long run education

This graph records the S&P500 gains and losses over the past 60 years. The stock market can be considered like the following season (Spring and Winter). The average period for Spring (we love Spring don’t we) is 57 months and the average period for Winter (we don’t like the cold) is 12 months.

IF we are in a crisis now, it typically takes around 12 months before it is spring again. In the more recent COVID-19 crisis, the winter lasted around 6 months (Feb21 to Aug21) before roaring back into Spring again.

It is what you do during winter that determines your financial results. Getting financially educated allows you to prepare for such opportunities.

Dollar Cost Averaging VS Buying the Dips
Dollar Cost Averaging VS Buying the Dips

Let’s assume that you can predict each and every dip (technically impossible) and buy them (further assuming you have the mental resilience to buy at the lowest). Do you know that Dollar Cost Averaging (DCA) beats buying the dip in this time period? Instead of focusing on the unknowns or black swan events, why not focus on what’s controllable which is doing simple Dollar Cost Averaging?

Novel Investor Asset Class Returns TableSource: NovelInvestor.com

As you can see, different asset class performs differently every year. Because our minds are loss averse in nature, we might not be able to weather through each storms if we are only into one asset class. Consider a multi asset portfolio might make it easier for our minds to weather through each storms when it comes.

Final Thoughts

Personally, I’m invested in the long run. In investment, there will be volatility and it is something we have be comfortable with either through education, experience or both.

Do you related to the above? Let me know in the comments below.

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

Why Dollar Cost Averaging is Not Working On China's Stocks

Why Dollar Cost Averaging is Not Working On China’s Stocks?

by with One Comment General EconomyInvestment AccumulationMoney Mindset
Why Dollar Cost Averaging is Not Working On China's Stocks
Why Dollar Cost Averaging is Not Working On China’s Stocks… yet.

The last 2 weeks was a bumpy one for China’s stocks. Technology companies ranging from Alibaba, Tencent, Didi and all the way to the educational sector pretty much spooked investors all over the world. There was massive selling and it seemed to have paused after JD reported good earnings.

Some of these company’s valuation are getting attractive once again as prices corrected in the last 2 weeks. This wasn’t music to the ears for those that are already invested. On the ground, I heard of many investors who took this opportunity to average down (buying at lower prices to lower the average prices). However, some investors seemed to have cracked under pressure and started asking why dollar cost averaging is not working.

Today, this article seeks to explain why dollar cost averaging is not working on China’s stocks… yet.

What is Dollar Cost Averaging (DCA)?

You probably have heard of this term Dollar Cost Averaging (DCA) from a friendly Financial Services Consultant as he was talking about investment. This strategy was made popular to retail investors as a way to invest by reducing the impact on volatility (the ups and downs) in the stock market.

“Time in the market, not timing the market”. This quote always serves as a reminder that investing (not speculation) is about being in the market and not timing the market. (Read More: Why Buy Low And Sell High Is Useless Advice).

Dollar Cost Averaging
Dollar Cost Averaging (Source)

The power of dollar cost averaging is making volatility your friend by buying at regular intervals. It is your objective to own as many shares as possible. In the above example, you are invest $1000 for 6 months.

Month #1: Share Price $10. You will be able to buy 100 shares ($1000/10 = 100)

Month #2: Share Price $13. You will be able to buy 77 shares now ($1000/13 ≈ 77). You have 177 (100+77) shares now. The total capital is $2000. The total value of your shares $2301 (177*$13). At this moment, you are profiting $301.

Month #3: Share Price $6. You will be able to buy 167 shares now ($1000/6 ≈ 167). You have 344 (100+77+167) shares now. The total capital is $3000. The total value of your shares $2064 (344*$6).  At this moment, you are losing $939. Most people starts to open their warchest now.

Month #4: Share Price $10.98. You will be able to buy 91 shares now ($1000/10.98 ≈ 91). You have 435 (100+77+167+91) shares now. The total capital is $4000. The total value of your shares $4776.30 (435*$10.98). At this moment, you are profiting $776.30 again. You are happy again.

Month #5: Share Price $7. You will be able to buy 143 shares ($1000/7≈143). You have 578 (100+77+167+91+143) shares now. The total capital is $5000. The total value of your shares $4046 (578*7). At this moment, you are losing $954 again. Some people start to freak out and wonder why dollar cost averaging is not working. In the case of China, the chart has been one direction downwards and “the moment” in the time for losses are prolonged.

This is the reason why people feel that dollar cost averaging is not working… yet.

Month #6: Share Price $10. You buy 100 shares. In total, you would have 678 shares. Total capital $6000. The total value of your shares $6780. You are profiting again.

You are making volatility your friend

Dollar cost averaging works when there are ups and downs. Currently, as the Chinese market is down, you will feel that it is not working. When the market recovers, DCA will suddenly “work again”. At this point, you will often hear people start talking about their investment gains.

“Time in the market, not timing the market”. 

I had to copy the quote again. Remember that investing (not speculation) is about buying shares of the companies/funds/assets you want through time. Dollar Cost Averaging is just one way that you can consider to invest.

Final Thoughts

You are not alone in this journey. I believe that there are many who have invested in the Chinese market because of good valuation. Of course, there will be non believers of Chinese market because of their tight regulations. At the end of the day, it is about investing with the strategy that you are most comfortable with.

You can buy stock tips. But you can never buy conviction.

Ask yourself if the asset allocation strategy fits your profile. Engage a professional to finetune the strategy. Lastly, do start. With every crisis, comes an opportunity.

With every crisis comes an opportunity
With every crisis comes an opportunity

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

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The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.