Is now the time to buy shares?

[CCOVICH]

Re: Is now the time to buy shares

Yes, they are better value. And I can gaurantee that you will get better returns investing now than if you invested last week.

And who says you wouldn't be better off waiting until next week. Or the week after. Or the week after that.

 

[ClubMan]

Re: Is now the time to buy shares

Or x weeks ago since we are comparing things to the past?

 

[PubMan]

Re: Is now the time to buy shares

And who says you wouldn't be better off waiting until next week. Or the week after. Or the week after that.

No one. But that has nothing to do with present discussion, ie that shares bought this week will have a higher return than the same shares bought 1 week ago.

 

[CCOVICH]

Re: Is now the time to buy shares

Well the point I am trying to make (as have others) is that if you didn't have the resources and inclination to invest in shares last week, doing so this week isn't necessarily a great idea either, regardless of the price.

 

[DrMoriarty]

Re: Is now the time to buy shares

Presumably, however, the 'buy-while-they're-down' logic does apply when buying units in an ETF, as opposed to directly purchasing shares?
[broken link removed]
If you'd bought into the ISEQ20 ETF a couple of weeks ago, €10K would have got you about 513 units (leaving aside charges, for the moment). Two days ago, you'd have got about 558 units. In that case, whatever the future movement of the individual shares that make up the index (and their relative weighting in the ETF), that buyer's future gains on a €10K investment will be marginally greater — or his/her losses marginally less. Or no?

Over time, trying to time the markets may be a mug's game (no relation! ), but does a momentary fall in prices not in some sense represent a 'buying opportunity' — presuming there's a subsequent recovery of sorts?

[Edit: post crossed with the last two, while I was dithering about linking to an image...]

 

[darag]

Re: Is now the time to buy shares

The saving and investing a lump sum every year approach you have outlined is generally considered a "buy and hold" strategy rather than DCA.

I believe DCA is often considered to apply to a wider range of strategies than this but I'm not sure quoting wikipedia or whatever to argue about definitions will add to the debate here. Nonetheless when people advocate DCA, they often mean in situations like the example I gave; investing a fixed amount in a risky asset at regular intervals ignoring the fluctuations in price.

I accept in the example you give above, the broker's stragegy may provide inferior returns but I still feel you really need to quantify this claim with specific variables: for example the gap between bond yields and stock yields, the volatility of both, the time period during which you apply DCA versus the overall investment period, etc.

In any case, isn't it the case that the idea of DCA isn't necessarily to maximise returns but instead to reduce risk without adversly affecting returns?

Anyway this is an interesting topic.

 

[CCOVICH]

Re: Is now the time to buy shares

Over time, trying to time the markets may be a mug's game (no relation! ), but does a momentary fall in prices not in some sense represent a 'buying opportunity' — presuming there's a subsequent recovery of sorts?

Yes, but it's not an approach I would recommed for novice investors.

 

[DrMoriarty]

Re: Is now the time to buy shares

IMO it's not really an 'approach' at all, more an unforeseeable opportunity to take advantage of a blip on the graph. And of course, nobody should invest in shares purely because the price drops. Falling knives, etc., as someone has already said.

 

[CCOVICH]

Re: Is now the time to buy shares

Well put.

 

[DrMoriarty]

Re: Is now the time to buy shares

I'll look up the Latin for it...
Unfortunately, I didn't have €10K lying around two days ago.

 

[room305]

Re: Is now the time to buy shares

I believe DCA is often considered to apply to a wider range of strategies than this but I'm not sure quoting wikipedia or whatever to argue about definitions will add to the debate here. Nonetheless when people advocate DCA, they often mean in situations like the example I gave; investing a fixed amount in a risky asset at regular intervals ignoring the fluctuations in price.

I am sure I've probably used it in this context as well before but it is usually a moot point. If it is just a case of investing part of your income into stocks then you don't have the alternative of investing a lump sum immediately unless you borrow money.

I accept in the example you give above, the broker's stragegy may provide inferior returns but I still feel you really need to quantify this claim with specific variables: for example the gap between bond yields and stock yields, the volatility of both, the time period during which you apply DCA versus the overall investment period, etc.

The studies were based on random data supplied using Monte Carlo simulation in a numerical framework designed to imitate the typical returns and volatility expected from a diverse stock market index or secure treasury bonds. They verified their conclusions using empirical data from the S&P 500 and US treasury bonds. With the exception of extremely risk averse investors (less than 10% of portfolio in stocks) buy and hold investments of longer than ten years had a much higher probability of outperforming DCA irrespective of when they were invested. The DCA was always applied over the entire length of the investment timeframe.

In any case, isn't it the case that the idea of DCA isn't necessarily to maximise returns but instead to reduce risk without adversly affecting returns?

Yes but that was the point of the studies - to prove it does significantly affect returns over the investment time frame.

Remember as well, these studies are usually conducted without consideration of brokerage charges which will be much higher for a DCA strategy. For the empirical data the example given averaged at 9% compounded annual return for buy and hold but only 8% for DCA. That's if the investor is 90% invested in stocks. If they are 50% invested then it is 8.3% and 7.6%.

Also, don't forget, studies usually don't account for dividends either. Use google scholar to find a host of academic papers on the subject. I haven't seen any attesting that DCA is a better strategy, except for brokers who benefit from additional charges.

 

[charttrader]

Re: Is now the time to buy shares

In any case, isn't it the case that the idea of DCA isn't necessarily to maximise returns but instead to reduce risk without adversly affecting returns?

Unfortunately, it does adversely affect returns.

I have nothing against DCA. If a person does not have a lump sum to invest, then some kind of DCA approach is fine. Many people do have lump sums to invest, however, and are still encouraged to DCA. Why? Because it's an easier way of getting people to part with their money. The salesmen in the 'investment' industry know that returns will be inferior (at least, they should know), but they don't bother informing the client of this. Instead, they're likely to whip out some irrelevant statistics showing the DCA approach in a bear market.

Since 1950, dollar cost averaging with the S&P 500 has failed to beat investing the lump sum at the start of the year in two years out of three.

 

[darag]

Re: Is now the time to buy shares

Hi charttrader, room305 - I did a bit of googling. There's an interesting article on DCA here. His analysis using historic prices leads him to the conclusion that while in many cases DCA (in the particular case where you've a lump sum which you drip feed into stocks) seems to cost too much in terms of returns for the protection it offers you, if it is applied for periods of longer than a year. And yes he does include dividends. However he also claims that it still can be a valuable strategy; in particular, if conducted over a period of one year and where the amount involved constitutes a significant part of your wealth (i.e. where the lowered risk would be considered valuable). Also note that his definition of DCA is the general one (i.e. including the case where you don't have the lump sum at the begining).

 

[Rory Gillen]

The comment made earlier that 'The returns from dollar cost averaging are most likely to be less than a lump sum invested' is mis-leading and most probably plain incorrect. The correct answer to Susang's question was given earlier - dollar cost averaging - which is the most effective way for most of us to deal with stock market volatility. The example below hopefully more effectively demonstrates the point.

Near term peaks in markets are only obvious in hindsight. Dollar cost averaging allows you to iron out the inevitable volatility that exists in markets. In fact, the success of the entire equity SSIA programe was founded on that very principle - equity SSIA investors made a positive return over the five years largely because they consistently added the same amount of money to the programme each month, which means they bought many more units in whatever fund they were in at the lower prices.

To nail it on the head - assume you started investing in an equity unit-linked fund when it was priced at €10. With your initial €254 you got 25.4 units. Now if the fund dropped in value by 50% to €5 per unit then at that time your €254 bought 50.8 units. Now ask yourself what was your average cost? It was not €7.5 - the mid point - but €6.67. The markets then only had to recover a small distance from the bottom for Equity SSIA investors to be back in profit. Therein lay the success of the SSIA Equity investor. It was not the stellar performance of stock markets, which were mostly still down in value over the period, but rather the positive effect of dollar cost averaging.

Of course, you have to believe markets will bottom...you if you don't assume that then you should not be in markets.....hope that helps.

 

[charttrader]

The comment made earlier that 'The returns from dollar cost averaging are most likely to be less than a lump sum invested' is mis-leading and most probably plain incorrect.

No Rory, all the research confirms that DCA will provide poorer returns. As a stockbroker and seller of expensive investment seminars, you should know this.

To nail it on the head - assume you started investing in an equity unit-linked fund when it was priced at €10. With your initial €254 you got 25.4 units. Now if the fund dropped in value by 50% to €5 per unit then at that time your €254 bought 50.8 units. Now ask yourself what was your average cost? It was not €7.5, the mid point but €6.67. The markets then only had to recover a small distance from the bottom for Equity SSIA investors to be back in profit. Therein lay the success of the SSIA Equity investor. It was not the stellar performance of stock markets, which were mostly still down in value over the period, but rather the positive effect of dollar cost averaging.

Big deal. DCA works well in a bear market, we know that. Cherry picking particular time periods doesn't alter the fact that DCA is almost certain to provide poorer returns for investors. DCA is convenient, but it will cost people.

After checking out the research, perhaps you'll include the long term results of the DCA approach in your investment literature.

 

[ClubMan]

The original question was "is now the time to buy shares?". My answer would be "yes" if you have decided that now is the right time for you to start investing for the medium/long term and "no"/"nobody knows" if you mean is now the "best" time to buy shares.

 

[macbri]

It all depends on the stock u pick and the price u paid.
This will be determined by your research and assessing risk/return of your stock picks.If your happy with your analysis and are comfortable with maximum downside,then go ahead and buy.

It doesn't matter in long run whether current market has dipped,it depends price u got in on your individual shares compared with value that u perceive company should be valued at.
I know this sounds basic but thats' the reality.

If u pick an overvalued share,then u may never receive a return-ie tech boom in 2001 where Nasdaq stood at over 5000,now still only 45% of that value 6 years later. This what drives me away from shares with a p/e over 15.


I have over $350k invested in stock market but am happy with risk as I have put options for 80% of portfolio and remainder is in high dividend yield companies apart from 1 tech & soccer club.

Agree that stocks should be held long term but if u think your stock is fully valued or see a better alternative investment then don't be afraid to sell.

 

[room305]

The comment made earlier that 'The returns from dollar cost averaging are most likely to be less than a lump sum invested' is mis-leading and most probably plain incorrect.

Considering that you advise people about stocks this is one hell of a statement to make. The long term trend of stock markets is up (otherwise why would you invest?) so DCA will always provide a poorer return over the longer term than lump sum investments.

The SSIA scheme was a five year investment, which is not a sufficiently long period of time for stock market investment. I can only hope that you follow charttrader's advice and add the facts regarding the underperformance of DCA over the longer term to your seminars.

 

[room305]

Re: Is now the time to buy shares

Hi charttrader, room305 - I did a bit of googling. There's an interesting article on DCA here. His analysis using historic prices leads him to the conclusion that while in many cases DCA (in the particular case where you've a lump sum which you drip feed into stocks) seems to cost too much in terms of returns for the protection it offers you, if it is applied for periods of longer than a year. And yes he does include dividends. However he also claims that it still can be a valuable strategy; in particular, if conducted over a period of one year and where the amount involved constitutes a significant part of your wealth (i.e. where the lowered risk would be considered valuable). Also note that his definition of DCA is the general one (i.e. including the case where you don't have the lump sum at the begining).

I am extremely dubious about the validity of this article. Apart from his use of language ("I feel that/It is my feeling that ...") he, similar to Rory, misrepresents the difference between DCA and investing via a lumpsum:

DCA is not for people who consider themselves competent market-timers. Market-timers lump-sum in at whatever time they judge that the market is very likely to go up in the near future. And they get back out of the market when they judge that the market is very likely to go down in the near future. The DCA choice is for people who fear that the market may drop drastically at any time, but do not feel competent to judge whether that is more or less likely now than at some other time.

The scenario he uses to justify why he is a "strong believer" (as he refers to it) that DCA is a better strategy is so specific as to be pointless. How many people have more than 50% of their entire net worth in cash to invest in the stock market in one lumpsum? He makes no mention of costs either.

The simple fact of the matter is that brokers push DCA because it is an easier sell to people who are worried about stock market volatility. However, they do not like to admit that it also offers comparatively poorer returns.

Think about it logically, the stock market offers the greatest returns of any asset class because it entails the greatest risk. By reducing your risk exposure through DCA, you also reduce your potential return.

 

[Gulliver]

Is now the right time to buy into the stock market with recent share prices dropping so dramatically. Or is it as straightforward as buying when share prices are low

Since the question was asked day before yesterday at 11.41am, the ISEQ has jumped almost 400 points