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Can a hot but smaller labor market keep making gains in participation?

It is simultaneously true that labor supply is not back to its pre-pandemic projected path and that labor demand is strong relative to supply. The result…



By Lauren Bauer, Aidan Creeron, Wendy Edelberg, Sara Estep

It is simultaneously true that labor supply is not back to its pre-pandemic projected path and that labor demand is strong relative to supply. The result is a smaller but hot labor market.

In anticipation of the release of this month’s Employment Situation Report, we take stock of the size and composition of the labor force to identify both populations and policies that could contribute to gains in labor force participation. Such gains would increase labor market income and would help the economy grow without creating more inflationary pressure.

As of June 2022, the size of the labor force has shrunk relative to its pre-pandemic path: the labor force is roughly three- to three-and-a-half million workers smaller than its pre-pandemic projection.[1] A large portion of the decrease in the size of the labor force relative to pre-pandemic projections—approximately a third—has nothing to do with labor force participation. First, the population is smaller because of pandemic-related deaths. While those deaths have been concentrated among those 65 and older (three-quarters of a million), more than a quarter of a million pandemic-related deaths are estimated for those between the ages of 18 and 64. Second, there are ongoing pandemic- and policy-related factors that are depressing immigration.

The biggest decline in the labor force has been among those ages 55 and over, with those 65 and older accounting for about a third of the total decline, owing to a combination of death among this group and lower labor force participation. The declines in participation likely reflect early retirements, concerns about health, and to some extent excess disability and lower life expectancy caused by disability due to COVID-19.

The aggregate labor force participation rate (the share of the population over the age of 16 who is working or actively seeking work) remains depressed at 62.2 percent. This piece documents changes in labor force participation between June 2022 and two earlier periods: 2016 (when LFPR began to pick up after a sustained decline) and 2000 (when LFPR peaked). By controlling for the contribution of changing demographics to LFPR, we isolate the contribution of participation to the differences in LFPR from June 2022 to 2016 and 2000. This analysis explores the opportunities that a smaller but hotter labor market afford, identifies populations who could drive labor force growth, and points to public policy interventions that could increase labor force participation.

Trends in labor force participation due to demographics

Figure 1 shows monthly and annualized labor force participation rates from the late 1970s to today. As of June 2022, LFPR is 0.9 percentage points below its 2019 average rate.[2] It is also 0.6 percentage points below its 2016 rate—the year the rate began its three-year rebound after 15 years of decline. And, compared to its 2000 peak, LFPR is down 4.9 percentage points; LFPR’s peak in 2000 reflected rising labor force entry among women, whose participation rate grew by more than 20 percentage points between the early 1960s and the turn of the century.

The overall decline in LFPR from the early 2000s has largely reflected the aging of the population and the movement away from work for young adults in school, which more than offset the increase in LFPR from increases in educational attainment (both high school and postsecondary) and from older workers staying in the labor market longer. Labor force participation has also been influenced by the business cycle, declining in the aftermath of the Great Recession and the COVID-19 recession and then recovering as conditions improved. Aaronson et al. find that structural factors (such as aging, the trajectory of participation among certain demographic groups, and disability insurance takeup) could explain almost all of the decline in LFPR between 2007 and 2014.

Figure 2 shows the effects of changing demographics on labor force participation. The figure shows two dashed lines that represent what the labor force participation rate would have been had the age, education, and sex distribution stayed the same but other factors continued to affect LFPR. Holding age, education, and sex constant at 2000 levels (the green line), the LFPR low point would have been 64.5 percent in 2020, rather than 61.8 percent; in other words, population aging and other demographic factors contributed 2.7 percentage points to the difference in LFPR between 2000 and 2020 and changing participation rates within groups 2.5 percentage points.[3] Additionally, even in the relatively short period since 2016, changes in demographics have pulled down LFPR. As shown by the gap between the blue dashed line and the black line, changing demographics lowered, on net, LFPR in June 2022 by 1.1 percentage points.

Labor Force Participation Rate vs Counterfactual Scenarios That Keep Age, Education, and Sex Unchanged

Changes in participation unrelated to demography

Although demographics explained most of the decline in LFPR from 2000 to 2009, other factors pushing down LFPR became increasingly apparent and important after the Great Recession through 2016. Indeed, at the time, policymakers, economists, and other observers had significant concerns that LFPR was continuing to decline even as other parts of the economy recovered. Then, from 2016 through just before the pandemic, LFPR rose even as demographics, on net, pushed it down. That experience offers evidence that factors can indeed push up labor force participation within demographic groups.

Figure 3a shows how changing labor force participation rates among different demographic groups contributed to the net change in LFPR from 2016 to June 2022 (shown in the blue dashed line in Figure 2). Figure 3b decomposes the change since 2000 (shown in the green dashed line in Figure 2). These decompositions show how LFPR has changed within demographic groups, that is, the portion of the labor force participation rate that changes with the propensity for different demographic groups to work. We find that groups with lower LFPRs than in prior periods have room for further recovery in LFPR, under the right conditions.

The contribution to LFPR of different groups’ propensity to work: 2016-June 2022

While on net LFPR as of June 2022 is still below its 2016 rate, some groups are participating at higher rates while others at lower rates. From 2016 to June 2022, women made the greatest positive contribution to the overall labor force participation rate, netting an increase of 0.4 percentage points, compared to men at 0.1 percentage point. Prime-age (25- to 54-year-old) women increased aggregate LFPR by 0.1 percentage points while prime-age men reduced it by 0.1 percentage points. Among prime-age men, the biggest decline came from men without a bachelor’s degree. The decline for women between 45 and 54 with less than a bachelor’s degree was also sizable.

In 2019, half of all prime-age women who were in the labor force had children under the age of 18. Women handled the brunt of child care responsibilities during COVID-19 and were the most likely to leave the labor force. Based on this analysis, women under 44 are more than back to their pre-COVID participation. Women between the ages of 25 and 44 added about a fifth of a percentage point to LFPR since 2016; more than two-thirds of that gain can be attributed to women with at least a bachelor’s degree.

Young people—those between the ages of 16 and 24—had the largest positive contribution to LFPR from 2016 to June 2022; men and women between the ages of 16 to 24 with less than a college degree added more than 0.6 percentage points to LFPR during that period.

For people 55 and over, a declining propensity to work reduced LFPR by 0.1 percentage points. Men with bachelor’s degrees over the age of 55 and women over the age of 65 collectively reduced LFPR by 0.3 percentage points from 2016 to June 2022; in some cases, these may have been early retirements spurred by COVID-19. Interestingly, less educated men ages 45 and older increased aggregate LFPR by 0.1 percentage point; more than half of this increase came from the 65+ age group.

Chart showing effects of changing group participation rates on overall labor force participation rate

The contribution to LFPR of different groups’ propensity to work: 2000-June 2022

Figure 3b decomposes the labor force participation rate between 2000 to June 2022 (holding demographics constant), helping to put the changes since 2016 in a longer-term context. Nearly three quarters of the decline since 2000 is attributable to the 16-24 group, whose pivot toward exclusive schooling consequentially explains their movement away from work; it remains to be seen whether the magnitude of the 2016 to June 2022 rebound will persist, partly reversing the long-term trend.

Men and women ages 25 to 54 with less than a bachelor’s reduced overall labor force participation by 0.81 percentage points and 0.83 percentage points, respectively, since 2000. To be sure, some structural factors not accounted for here help to explain those declines. For example, the flow of net international migration to the United States has decreased substantially since 2016. Because immigrants tend to have higher LFPRs, that decrease puts downward pressure on the aggregate LFPR. Nonetheless, the high-water mark in 2000 suggests room for more significant increases in LFPRs among prime-age people than if we just compare current conditions to those in 2016.

For all groups over the age of 55, LFPRs have been higher since 2000 even though some of these groups saw decreases since 2016. For a time, improving health at older ages and changes in work conditions drove LFPRs up among older workers, but the COVID-19 pandemic dramatically altered those trends, both in terms of the health of older workers and the risk that working posed to them. However, even after the pandemic has receded as a factor determining LFPR, the past few years may have shown that LFPRs among older people will not persistently rise as predicted. For example, a greater share of the increases in LFPRs among older people in the decade after the Great Recession may have been a temporary response to the loss of wealth and earnings early in that period; the increase in wealth from equity and real estate prices in 2020 and 2021 along with the health effects of the pandemic may have abruptly ended that response.

Comparing LFPRs among different groups between June 2022 and both 2016 and 2000 shows where history suggests there is the potential for increases. Among prime-age people—particularly among men and among people without a bachelor’s degree—comparisons to earlier years suggests room for substantial increases. In contrast, the recent decreases in LFPR among older workers still leaves participation rates higher than in 2000. Improvements among that group depend on whether the pandemic persistently altered the trends that had been pushing up LFPRs. In addition, the increases among younger workers may not be durable if those ages 16 to 24 return to going to school exclusively.

How Can the Labor Market Grow Through Increased Participation?

Based on this analysis, is there room for the labor market to grow? Yes.

The factors that have depressed labor force participation among older people and that have increased labor demand in general have led to opportunities for younger workers; but, this has not led to uniformly higher participation for all groups under age 65. Most significantly, participation is still depressed for prime-age men—particularly those without a bachelor’s degree. The decline for women between 45 and 54 with less than a bachelor’s degree has also been sizable. If LFPR came back to its pre-pandemic trend for those groups, the labor force would be larger by hundreds of thousands of workers.

Hot labor market conditions in 2016-19 pulled less educated prime-age men off the sidelines and into the labor market. These men are likely more responsive to current labor market demand-side factors than older workers. And indeed, men with less than a bachelor’s over the age of 45 were participating at a higher rate in June 2022 than in 2016. However, the experience of 2016-2019 showed that these men responded to an improvement in labor market conditions with a considerable lag. Even though participation remains depressed among less educated men under 45, policymakers should continue to focus on encouraging participation among this group.

Moreover, policymakers should not take for granted the increases in participation seen so far among other groups. On the whole, prime-age women have increased their LFPR relative to 2016 lows. However, those gains may have come at great personal cost among women with young children and other care responsibilities during the pandemic. Moreover, LFPRs among prime-age women with less than a bachelor’s are still well below the levels in 2000. This group should garner the attention of policymakers hoping to increase the size of the labor market, and The Hamilton Project has put out policy proposals that improve productivity and room for advancement in jobs that require less formal education.

In order to pull people off the sidelines, policies that spur productivity and wage growth, remove barriers to entry, invest in workforce development, and increase the returns to work for those with lower wages through the Earned Income Tax Credit will be crucial. As the ongoing COVID-19 pandemic becomes endemic, proposals that allow people with disabilities to more fully engage in the labor market are essential to help improve participation. Policy proposals to support women in the workforce, whether by increasing the returns to work or by supporting caregiving and child care responsibilities, will allow women to not only enter but stay in the labor force.

[1] Calculating the changes in the sizes of the population and labor force relative to pre-pandemic projections is less straightforward than it might appear. In January 2022, the US Bureau of Labor Statistics updated its population estimates for household survey data to introduce the blended 2020 decennial census to the population composition and size. This revision was incorporated into the data starting in 2022, which implies revisions to early years. That makes 2022 estimates of labor force participation and the labor force look somewhat better than the years leading into the pandemic for technical reasons. If one adds the increase in the size of the labor force between December 2021 and January 2022 to 2022 Q2 and compares it with the labor force projection from the Congressional Budget Office (CBO) in January 2020: the size of the difference between the CBO projection plus the January increase and June 2022 is about three-and-a-half million. One would arrive at the three million number if instead one extrapolates pre-pandemic trends to determine the labor force projection alongside the annual revisions to the size of the population; in other words, the size of the difference between the actual labor force and the pre-pandemic trend is roughly three million.

[2] As detailed in footnote 1, the one-time population revision incorporated into the monthly CPS exaggerates the progress made in closing the LFPR gap between 2019 and 2022.

[3] Throughout this analysis, we hold age, sex, and education constant to document the contribution of changing labor force participation within these groups. Were we to hold only age and sex fixed, the counterfactual LFPR (shown in the dashed lines in figure 2) in June 2022 would have been 63.7 percent (2016 age and sex demographics held constant) and 66.9 percent (2000 age and sex demographics held constant).

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports, published online. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.

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Fauci And The CIA: A New Explanation Emerges

Fauci And The CIA: A New Explanation Emerges

Authored by Jeffrey A. Tucker via Brownstone Institute,

Jeremy Farrar’s book from August 2021…



Fauci And The CIA: A New Explanation Emerges

Authored by Jeffrey A. Tucker via Brownstone Institute,

Jeremy Farrar’s book from August 2021 is relatively more candid than most accounts of the initial decision to lock down in the US and UK. “It’s hard to come off nocturnal calls about the possibility of a lab leak and go back to bed,” he wrote of the clandestine phone calls he was getting from January 27-31, 2020. They had already alerted the FBI and MI5. 

“I’d never had trouble sleeping before, something that comes from spending a career working as a doctor in critical care and medicine. But the situation with this new virus and the dark question marks over its origins felt emotionally overwhelming. None of us knew what was going to happen but things had already escalated into an international emergency. On top of that, just a few of us – Eddie [Holmes], Kristian [Anderson], Tony [Fauci] and I – were now privy to sensitive information that, if proved to be true, might set off a whole series of events that would be far bigger than any of us. It felt as if a storm was gathering, of forces beyond anything I had experienced and over which none of us had any control.”

At that point in the trajectory of events, intelligence services on both sides of the Atlantic had been put on notice. Anthony Fauci also received confirmation that money from the National Institutes of Health had been channeled to the offending lab in Wuhan, which meant that his career was on the line. Working at a furious pace, the famed “Proximal Origin” paper was produced in record time. It concluded that there was no lab leak. 

In a remarkable series of revelations this week, we’ve learned that the CIA was involved in trying to make payments to those authors (thank you whistleblower), plus it appears that Fauci made visits to the CIA’s headquarters, most likely around the same time. 

Suddenly we get some possible clarity in what has otherwise been a very blurry picture. The anomaly that has heretofore cried out for explanation is how it is that Fauci changed his mind so dramatically and precisely on the merit of lockdowns for the virus. One day he was counseling calm because this was flu-like, and the next day he was drumming up awareness of the coming lockdown. That day was February 27, 2020, the same day that the New York Times joined with alarmist propaganda from its lead virus reporter Donald G. McNeil

On February 26, Fauci was writing: “Do not let the fear of the unknown… distort your evaluation of the risk of the pandemic to you relative to the risks that you face every day… do not yield to unreasonable fear.”

The next day, February 27, Fauci wrote actress Morgan Fairchild – likely the most high-profile influencer he knew from the firmament – that “be prepared to mitigate an outbreak in this country by measures that include social distancing, teleworking, temporary closure of schools, etc.”

To be sure, twenty-plus days had passed between the time Fauci alerted intelligence and when he decided to become the voice for lockdowns. We don’t know the exact date of the meetings with the CIA. But generally until now, most of February 2020 has been a blur in terms of the timeline. Something was going on but we hadn’t known just what. 

Let’s distinguish between a proximate and distal cause of the lockdowns.

The proximate cause is the fear of a lab leak and an aping of the Wuhan strategy of keeping everyone in their homes to stop the spread. They might have believed this would work, based on the legend of how SARS-1 was controlled. The CIA had dealings with Wuhan and so did Fauci. They both had an interest in denying the lab leak and stopping the spread. The WHO gave them cover. 

The distal reasons are more complicated. What stands out here is the possibility of a quid pro quo. The CIA pays scientists to say there was no lab leak and otherwise instructs its kept media sources (New York Times) to call the lab leak a conspiracy theory of the far right. Every measure would be deployed to keep Fauci off the hot seat for his funding of the Wuhan lab. But this cooperation would need to come at a price. Fauci would need to participate in a real-life version of the germ games (Event 201 and Crimson Contagion). 

It would be the biggest role of Fauci’s long career. He would need to throw out his principles and medical knowledge of, for example, natural immunity and standard epidemiology concerning the spread of viruses and mitigation strategies. The old pandemic playbook would need to be shredded in favor of lockdown theory as invented in 2005 and then tried in Wuhan. The WHO could be relied upon to say that this strategy worked. 

Fauci would need to be on TV daily to somehow persuade Americans to give up their precious rights and liberties. This would need to go on for a long time, maybe all the way to the election, however implausible this sounds. He would need to push the vaccine for which he had already made a deal with Moderna in late January. 

Above all else, he would need to convince Trump to go along. That was the hardest part. They considered Trump’s weaknesses. He was a germaphobe so that’s good. He hated Chinese imports so it was merely a matter of describing the virus this way. But he also has a well-known weakness for deferring to highly competent and articulate professional women. That’s where the highly reliable Deborah Birx comes in: Fauci would be her wingman to convince Trump to green-light the lockdowns. 

What does the CIA get out of this? The vast intelligence community would have to be put in charge of the pandemic response as the rule maker, the lead agency. Its outposts such as CISA would handle labor-related issues and use its contacts in social media to curate the public mind. This would allow the intelligence community finally to crack down on information flows that had begun 20 years earlier that they had heretofore failed to manage. 

The CIA would hobble and hamstring the US president, whom they hated. And importantly, there was his China problem. He had wrecked relations through his tariff wars. So far as they were concerned, this was treason because he did it all on his own. This man was completely out of control. He needed to be put in his place. To convince the president to destroy the US economy with his own hand would be the ultimate coup de grace for the CIA. 

A lockdown would restart trade with China. It did in fact achieve that. 

How would Fauci and the CIA convince Trump to lock down and restart trade with China? By exploiting these weaknesses and others too: his vulnerability to flattery, his desire for presidential aggrandizement, and his longing for Xi-like powers over all to turn off and then turn on a whole country. Then they would push Trump to buy the much-needed personal protective equipment from China. 

They finally got their way: somewhere between March 10 or possibly as late as March 14, Trump gave the go ahead. The press conference of March 16, especially those magical 70 seconds in which Fauci read the words mandating lockdowns because Birx turned out to be too squeamish, was the great turning point. A few days later, Trump was on the phone with Xi asking for equipment. 

In addition, such a lockdown would greatly please the digital tech industry, which would experience a huge boost in demand, plus large corporations like Amazon and WalMart, which would stay open as their competitors were closed. Finally, it would be a massive subsidy to pharma and especially the mRNA platform technology itself, which would enjoy the credit for ending the pandemic. 

If this whole scenario is true, it means that all along Fauci was merely playing a role, a front man for much deeper interests and priorities in the CIA-led intelligence community. This broad outline makes sense of why Fauci changed his mind on lockdowns, including the timing of the change. There are still many more details to know, but these new fragments of new information take our understanding in a new and more coherent direction. 

Jeffrey A. Tucker is Founder and President of the Brownstone Institute. He is also Senior Economics Columnist for Epoch Times, author of 10 books, including Liberty or Lockdown, and thousands of articles in the scholarly and popular press. He speaks widely on topics of economics, technology, social philosophy, and culture.

Tyler Durden Thu, 09/28/2023 - 17:40

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Watch: Biden Tells People To Stop Questioning COVID Shots

Watch: Biden Tells People To Stop Questioning COVID Shots

Authored by Steve Watson via Summit News,

In remarks made Wednesday, Joe Biden…



Watch: Biden Tells People To Stop Questioning COVID Shots

Authored by Steve Watson via Summit News,

In remarks made Wednesday, Joe Biden argued that people, including potential “leaders” should stop saying “inflammatory things” about COVID vaccinations and fall into line with what his administration is telling them to do.

“What leaders say matter, in terms of people’s confidence in things they’re not sure about,” biden began.

He continued, “And one of those areas — you saw what happened with regard to the crisis — health crisis that we had that cost us — we lost well over a million people. And as time began to move on, you had more and more voices saying, “No, no, no. You don’t need to get that shot. You don’t need to be — get — you don’t need to.”

“We have a new strain of COVID now, and we have answers for it,” Biden contended, further stating “I just would urge those in public life and both political parties or no political party to be cautious about the ac- — the sometimes inflammatory things you say about this, because people’s lives are at stake.”


That will be the COVID shots that don’t prevent anyone from getting COVID or stop transmission of the virus then will it? The ones that cause more serious side effects in children than they do save lives?

The comments come in the wake of revelations that Anthony Fauci was secretly escorted into CIA and State Department meetings to steer the direction of the COVID origins investigation away from the lab leak evidence.

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Tyler Durden Thu, 09/28/2023 - 17:00

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Dollar cost averaging: navigating market volatility for long term success

Back in March 2022, Toby Roberts advocated for a dollar cost averaging approach to investing. Considering that The Montgomery Small Companies Fund has…



Back in March 2022, Toby Roberts advocated for a dollar cost averaging approach to investing. Considering that The Montgomery Small Companies Fund has returned 11.19 per cent in the three months to 31 August, resulting in an outperformance of 8.97 per cent over its benchmark, I wanted to explore whether dollar cost averaging has provided another win for investors.

Back in March last year Toby wrote; “It is periods of uncertainty like this when investors may like to be reminded of the merits of dollar cost averaging. Dollar cost averaging is the investing strategy [equally] dividing up the total amount to be invested and periodically purchasing stocks, in an effort to reduce the impact of volatility and emotion on an investment. This is an investment strategy all Australian employees will be familiar with as it reflects the periodic contributions employers make into their superannuation.”

Importantly, a large lump sum invested at the beginning of a bull run in markets is always going to beat a dollar-cost-averaging approach, in which the investor holds a lot more cash until the amount earmarked has been fully invested. But during periods of volatility or major market declines, dollar cost averaging helps to ease the pain of falls while ensuring more units (of individual stocks or units in a managed fund) are purchased at cheaper prices as those prices get cheaper.

The Global Financial Crisis and the more recent COVID-19 pandemic were classic examples of events that inspired individuals to act in concert, producing the consequences of herd behaviour and panic. 

Thanks to the indefatigable and unchanging nature of human behaviour, such events are reasonably frequent – indeed, they should be expected. Tey inspire fear and apprehension, which is why the dollar cost averaging approach is a good method to consider. Dollar cost averaging takes the emotion out of investing and helps to ensure sensible decisions are made while also providing some comfort when the tide goes out. And keep in mind bear markets are transitory.

Rather than be frightened of the inevitable volatility, the dollar cost averaging strategy will see you excited by periods of panic and looking forward to the cheaper prices that ensue. 

For the U.S. S&P500, 2022 produced the seventh-worst calendar year return since 1928. But last year’s awful performance was a great thing for anyone who was putting money into the market on a periodic basis because bear markets are great for dollar cost averaging.

Before we examine the benefits of applying the dollar cost averaging approach suggested by Toby from March last year, lets revisit what the strategy is.

Dollar cost averaging, which can be applied to individual securities or stocks, index funds, and actively managed funds – the latter being my preference for young investors who have a great deal of time and very long runways for growth but no time to research investing in stocks directly.

Following an explanation of dollar cost averaging, we will explore a version I developed many years ago and first revealed to Ross Greenwood’s listeners when he hosted the 2GB Radio Money News program.

There are two ways to approach the stock market. The first, which is extremely popular, is betting on the ups and downs, to treat stocks like a gambler betting on black or red at the roulette wheel.  The problem with this approach is that the stock market becomes a casino, and the house usually wins.

The alternative is to recognize stocks are pieces of businesses.  Businesses create wealth by becoming more valuable because they generate growing profits, which can be distributed – even though they may not be.

Build value, ignore price

The process of a business creating wealth is a simple one, in theory. It’s much harder on the ground of course, requiring skill, intestinal fortitude, experience, teamwork, and a healthy dose of good fortune.

A company starts with some capital that has been contributed by its shareholders. If the venture is successful, the investment will generate revenues in excess of expenses, and a profit will accrue. This profit can then be distributed but may instead be reinvested, which builds on the original equity contributed and, therefore, the value of the enterprise. 

Think about it this way; a bank account is opened with $100,000 and earns a 20 per cent return from the interest in its first year. Now you must agree that would be a very special and valuable bank account. In fact, given that interest rates on term deposits, at the time of writing, are about four per cent, you could sell the special bank at an auction and someone would bid a lot more than the $120,000 it now has deposited after the first year. 

I wouldn’t be surprised if someone paid four or five times the balance of the bank account to own it. If they thought there was going to be a recession, or they thought interest rates might fall again, they’d be falling over themselves to own that special bank account for perhaps $500,000.

And if the bank account continued to earn 20 per cent annually for thirty years and the owner reinvested that interest, that bank account would have an equity balance of over $27 million and still be earning 20 per cent. Auction a $27 million bank account earning 20 per cent per annum and you can expect to see bids of more than $100 million (subject to interest rates at the time).

Can you see what I’ve done? I’ve just explained how businesses build wealth and how the stock market (the auction house) prices them.

The second approach to the stock market is to buy shares in those businesses that are able to sustainably generate high returns on their equity, and to wait for the wealth creation process to do its thing. 

Of course, while you are letting the years pass and while the business performs its wealth-creation miracle, the auction house will be open. On some days, the attendees will be jovial and full of optimism, paying insanely high prices for the ‘bank accounts’ being auctioned. At other times they will be depressed and despondent, only thinking the worst. 

Their moods however have nothing to do with the quality of that bank account that continues to earn 20 per cent per annum.  Their mood is instead influenced by exogenous factors such as whether Donald Trump will be re-elected, or whether China’s unemployment rate is rising or falling. These things affect the ‘price’ of the bank accounts being auctioned but they have nothing to do with their ‘value’ or worth.

Dollar Cost Averaging

The dollar cost averaging strategy is what I call a ‘contrarian’ strategy. It forces you to be less optimistic when others are very optimistic while ensuring you are more optimistic when others are despondent.

The idea is to be greedy when others are fearful and fearful when others are greedy, to quote one of the world’s most famous and successful investors.

On days when the stock market falls because everyone at the auction house is frightened, you simply need to remind yourself of the long-term wealth creation process of business, and apply dollar cost averaging.

We begin by setting ourselves the goal of investing a fixed amount of money – say $1,000 – every month or every quarter in either a particular stock, a portfolio of stocks, an index fund, or an actively managed fund. No matter what the market throws at us, no matter how crazy the auction house becomes, we simply keep investing our $1,000 monthly or quarterly – whatever was decided.

If the unit price of the actively managed fund is $2.50, the $1,000 investment will buy 400 units. If the unit price falls to $2.00, the next $1,000 investment will buy 500 units. And when sentiment in the auction house is overly optimistic and the unit price is $5.00, the $1,000 investment will buy only 200 units. With dollar cost averaging, more units are acquired at cheaper prices than at expensive prices but the strategy is always acquiring more units.

One benefit of the strategy is it helps the investor avoid being paralysed by fear. This can happen if an initial investment is made at $5.00 and then the unit price falls to $2.50. Many investors listen to the noise surrounding the events that caused the price drop rather than taking advantage of it. Instead of adding to their investment, they forget the long-term wealth creation process of business growth and run for the hills. The stock market is one of the few markets where shoppers zip up their wallets and run for the hills when the items are ‘On Sale’.

Some investors who buy at $5.00, panic when the price falls to $2.50. Being unable to bear the losses anymore, and fearing even greater losses, they sell at $2.50. When the market eventually recovers – it usually does – they miss out on the recovery. Other investors who buy at $5.00 are also petrified but do nothing when the price falls to $2.50. They simply wait until the prices recover.  The problem with this strategy is that they have lost through the time value of money and they’ve not taken advantage of the opportunity to generate a profit from the recovery.

Dollar cost averaging seeks to mitigate the opportunity cost associated with doing nothing.

Let’s look at a ten-month period during which one thousand dollars is invested in a fund monthly, and the unit price of that fund falls from $10.00 to $4.00 and then rises back to $10.00.

Table 1.  Dollar-Cost Averaging example.

Dollar Cost Averaging Example

If all $10,000 was invested at the beginning of the period, the value at the end of the period would be $10,000. And if all the funds ($10,000) were invested at the end of the period, the value would again be $10,000.

Because the investor took advantage of the auction house’s depressed sentiment during the period using the dollar cost averaging strategy, additional units were purchased while the units were at low prices. The $10,000 invested is worth over $17,000 at the end of the period because the average purchase price was $5.88 per unit and the units ended the period at $10.00.

Of course, it’s not always peaches and cream. If the unit prices had risen first and then fallen back to the starting price, the investor would have less value than investing the funds all at the beginning or at the end because they purchased additional units at higher prices.

But the end of the 10-month period doesn’t represent the end of the experience. As we demonstrated earlier, the process of business wealth creation takes years. Ten months is too short a time frame to consider the strategy a success or otherwise. 

Provided the investor has picked a portfolio of select quality companies whose earnings march upwards over the years, or a fund manager that invests with discipline in such companies, the long-term value of the shares or units will rise, and so will the portfolio’s value.

Applying it to the real world

Figure 1.  Performance of The Montgomery Small Companies Fund

Performance of the Montgomery Small Companies FundSource: Fundhost

I examined the outcome of investing $10,000 each quarter, since inception, in the Montgomery Small Companies Fund (the Fund) with the objective of comparing it to an initial investment of the same total amount as that which was invested through dollar cost averaging.

It’s an unfair comparison because the unit mid-price of the Fund at the time of writing is $1.223 versus the unit price at inception of $1.00. Moreover, the unit price has not spent a great deal of time below the $1.00 unit price at inception, which means there haven’t been a huge number of opportunities to acquire more units at prices below the inception price.

I have also ignored distributions. They are neither included in returns nor reinvested. The returns from investing all at inception or via a dollar cost averaging strategy would be even better than those described here.

Nevertheless, it remains an instructive exercise, especially for those who might be more nervous about investing and those who might fear the effects of recessions, war, inflation, and other exogenous factors on the performance of the stock market.

Keep in mind the period begins on 20 September 2019. The Fund was launched just a few months before COVID-19 hit. If you were ever going to have to endure an event that justified your fears about investing at the wrong time, it would be COVID-19. 

Table 2.  Dollar Cost Averaging $10,000 into the Montgomery Small Companies Fund quarterly.

Dollar Cost Averaging $10,000 into the Montgomery Small Companies Fund quarterly.

Given there were only two quarterly investment dates from 16 where the unit price was below the initial unit price at inception and that the unit price at the end of the period is higher than at the beginning, it is a reasonable assumption that investing all at the beginning will produce a better outcome than dollar cost averaging. Gary and Dom are doing too good a job managing the Fund for dollar cost averaging to be superior.

And that is evident in the results. Investing $10,000 each quarter resulted in an investment of $160,000 and the acquisition of 141,474.6 units for an average price of $1.13, clearly higher than the initial price of $1.00. 

Had you invested $160,000 at the inception price of $1.00, the value today would be $195,696. The dollar cost averaging strategy resulted in $160,000 invested, which at the 20 September 2023 unit price of $1.2231, is now worth $173,037.

As I mentioned, it is an unfair comparison. And hindsight plays a big part. Because I am assessing the strategies today, I am comparing 16 investments of $10,000 with the same total amount at inception. I couldn’t have known at inception that investing $160,000 would be the appropriate amount to invest. I might have invested much less or much more. 

The exercise, however, does demonstrate that a dollar-cost averaging strategy can ensure disciplined habits while also securing attractive long-term returns (provided the manager continues to do a good job) even if serious market setbacks have to be endured. 

Obviously, it’s easy to look back at these things after the market has come roaring back.

Indeed, it is the ever-present possibility of market setbacks that renders the dollar cost averaging approach a comfortable strategy for navigating those adverse episodes in markets. Dollar cost averaging ensures more units are purchased as the market or the fund declines and aids a more rapid recovery as markets return to confidence. Down markets are a wonderful time to be long-term bullish.

Of course, if you have justifiable confidence in the manager’s ability to create wealth over the long term, then maximising an investment initially is the way to go. The caveat is that we just don’t know what could happen in between. 

Portfolio Performance is calculated after fees and costs, including the investment management fee and performance fee, but excludes the buy/sell spread. All returns are on a pre-tax basis. This report was prepared by Montgomery Lucent Investment Management Pty Limited, (ABN 58 635 052 176, Authorised Representative No. 001277163) (Montgomery) the investment manager of the Montgomery Small Companies Fund. The responsible entity of the Fund is Fundhost Limited (ABN 69 092 517 087) (AFSL No: 233 045) (Fundhost). This document has been prepared for the purpose of providing general information, without taking account your particular objectives, financial circumstances or needs. You should obtain and consider a copy of the Product Disclosure Statement (PDS) relating to the Fund before making a decision to invest. The PDS and Target Market Determination (TMD) are available here: While the information in this document has been prepared with all reasonable care, neither Fundhost nor Montgomery makes any representation or warranty as to the accuracy or completeness of any statement in this document including any forecasts. Neither Fundhost nor Montgomery guarantees the performance of the Fund or the repayment of any investor’s capital. To the extent permitted by law, neither Fundhost nor Montgomery, including their employees, consultants, advisers, officers or authorised representatives, are liable for any loss or damage arising as a result of reliance placed on the contents of this document. Past performance is not indicative of future performance.

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