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Lump Sum Investing vs Dollar Cost Averaging Strategy!

Lump Sum Investing vs Dollar Cost Averaging Strategy!

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What is the best stock market investment strategy to deploy money is the ultimate question to be answered, if you have money of course. Most people think about whether to deploy it all immediately (LUMP SUM INVESTING) or to stage the purchases over a period of time (DOLLAR COST AVERAGING). Vanguard and other research shows that you’ll do better with a lump-sum investment in 70% of cases and better with dollar cost averaging in 30% of cases. So, it is up to you what kind of odds do you wish to bet on.

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However, you know I will not give you just the stock market investing statistics. By discussing the difference between investing and speculating; the difference between lump sum investing where you invest when you have the money and when a financial instrument fits your required return and dollar cost averaging, where you are more concerned about the market as you try to time it we will also touch on what really matters for the long-term.

Another point is discussing the importance of buying the bottom in the market - some stocks are up 50% since March 22, but how much does that change their investment quality? You'll be surprised how important it is! The importance of timing the market will also give you the answer when it comes to investing it all in a lump-sum or dollar cost average over time.

Dollar Cost Averaging vs. Lump Sum Investing

Transcript

Good day fellow investors. How to buy stocks in a volatile market, if you have some cash when to deploy, spread it over 12 months, or put the whole lump sum in immediately. I've done some research from Vanguard some research papers, and then I'll share also my own experience. And I hope by the end of this video, you'll have a clearer idea of how and when to deploy your money during this environment.

So if you've got some cash with I don't know rainfall, a bonus, stimulus, or whatever, and you want to deploy some cash or debt or you have been waiting for a crash to deploy some cash. Now the question is how to deploy that? So there are two strategies. One is to dollar cost average to make a systematic investment over time, the other is to simply put in the lump sum. We're going to show historical results of that set of both strategies to see which one is best and how, maybe best fits you, then we're going to discuss something very close to this, which is investing versus speculating.

I'm going to share with you the importance of buying at the right moment in the market, what's the best time to buy really to nail the bottom, how important that is when it comes to investing. And then I've also share my experience over the last 20 years that I have been investing, how I did it during one crash the dotcom, the end of the dotcom crash that I caught 2009, the Great Recession crash and the current and the 2015 and the 2018 crash and how I dealt with those.

Let's start with the content. So let's say you've got $100,000 that you received this morning. Now what to do, should you invest immediately all the money or should you spread the investments over 12 months, I've gone to Vanguard and they've done the research so a lot of research has been done no need to spend a lot of time I'm on it but you have a systematic the dollar cost averaging, investment where you invest over 12 months and if you invest immediately all the money and they have made the analysis from 1926 to 2015 in the United States, United Kingdom and Australia, there is a 68% chance that you do best when you invest it all at one go and the 32% chance that you do better with dollar cost averaging.

So when you start investing, let's say seven out of 10 times you will be better with a lump sum. Three out of 10 times you will be better with the dollar cost averaging strategy. Thus, it is up to you whether you want to bet on the odds of 7 out of 10 or 3 of 10.

As we cannot time the market we cannot know what will happen in the market. The last month have been has been full of negative news the market is up 25% so you cannot time that and now you have to see what odds do you like lump sum, 7 out of 10 odds of doing good or dollar cost averaging systematically investing over a period of 12 months? 3 out of 10, you do good. I think this gives the answer, but we'll have a lot more to discuss and some nuances on that.

Why does the lump sum portfolio outperform? Well, it always boils down to investing versus speculation. Investing is a positive sum game. When you are dollar cost averaging a lump sum you time the markets you try to time the market.

And we all know that time in the market, the businesses that growth, the development, the dividends, that is what gives you long term returns, and that is what skews the odds 70% for the lump sum investment when you have the money against the dollar cost averaging or systematic spreading if the investment. Now dollar cost averaging here isn't I have 1000 every month and that's what I have and that's investing. That's a different kind of dollar cost averaging. We are talking here about what to do if you have the money now.

Just a story here I have started with really social media financial writing analysis research in 2015. So we are now five years in and I got constant emails from people waiting for a crash 2015, 2016 there was a crash there. And everybody said I'm selling everything, I'm waiting for a 50% crash and waiting for 2009 lows.

Still with the current situation, just the market and many other stocks are much much higher, the market is up 48% since then, so this is the cost of waiting for a better entry point. Similarly, missing the 25 best days of the S&P 500 since 1970 would change 100 dollar investment from return that we are now with dividends even more than 2000 something 3000 to just what $400.

So by staying invested and not missing 25 days, the 25 best days in the market, you make 7 times more money. And investing is about owning businesses dividends, growth, value and wealth accumulation. The best days are usually after the worst days. As you cannot time when the best days will come when is the bottom then it's better to stay invested not to miss the best days in the market.

Dollar Cost Averaging

And where does the real divergence create between 2800 points of the S&P 500 of the 100 investment and $400? The divergence always comes in the recovery. 1987 look at this all similar and then boom, you have a big divergence after the second day after Monday crash was already a great day, those that missed that. Then everything stable, bam 2003 recovery, huge divergence after the crash and then the ballistic divergence after 2009. So it's better to stay in that because then you are also getting a share of the market that is going up.

Now timing the market jumping in and out of the market everage annual total return for the S&P 500 index from 1999 to 2019, fully invested 6% annual return just 10 days, which we're somewhere March 2009, October 2009. Bam, you are down 4% annually. That's a huge difference in returns. Missing more 20 days I'm not even going to mention how detrimental that can be to your portfolio.

Now also when they is a crash where the S&P 500 fell by 20% or more if you stay fully invested a year later, two years later, and three years later, the cumulative returns are always higher. If you tried to time the market in any month or three months or even worse six months, if you're out of the market, six months out of investing, you are losing a lot because that is how investing works.

Now let me tell you about buying perfectly about perfectly timing the bottom and how important that is all this media frenzy about stocks going down 5-10 percent, 3% up, pre market, after market, how important that really is. So you might think it would be great to nail this bottom to have bought everything the 22nd of March 2020. You will be now up what 25% and you would be a great investor because that's what great investors do. Right? Well, let me show you this.

Lump Sum Investing And Market Crashes

This is a stock from December 1981. It was $590. It fell 28% in nine months. So in August 16, 1982, it was down to 430. So you might think, oh my God, if you bought in 1981 you would feel terrible for not buying in 1982 or if you missed the bottom of 1982 you would feel terrible for having to buy it later at 600 or something right? Well, you have to be smart and buy at the bottom is what everybody is trying to sell. Right? Well, let me show you this. You'll be pleasantly surprised.

Company is a textile company no moat, terrible business called Berkshire Hathaway run by a certain now he's now 90 years old, you better stay away from that. But if you invested with the stock level at 590 or 430, the difference is making if you paid 590, 482 times your money, and if you're paid for 430, 661 times your money. Now if you make 500 times your money, do you complain whether it is 482 or 661?

No, you don't and the annualised return, the difference in the annualised return between buying at the bottom and at the top 1981 1982 is less than 1%. The bottom point it's 90 basis points. So there is practically long term no difference when it comes to that. So this is my answer to all those that want to try to time the market. You should spend that energy on focusing on finding a great business that will give you compounding returns of 15, 10-15% over the very long term that will grow, that will have a good business and moat, good management. And that will deliver your returns. Your returns will not come from you buying and selling frenetically. Actually, your returns will go away if you do that.

Valuation Metrics And Lump Sum Investing

So stay invested. Keep investing when you find a good business doesn't really matter what price you buy it. And that's something Charlie Munger often says, but few understand him. Let me explain this a little bit more in detail. Now this week, I bought a little bit of Facebook for my learning portfolio. And everybody said, oh Sven, you should wait for 150 to buy it.

You should have bought it 140 or it's too early, it will go lower because of advertising prices going down so revenue will go down there will be better buying opportunities but let me show you something that investors keep in mind, if Facebook keeps compounding its book value, book value not the stock price is book value at 20% like it did last year, for the next 20 years, the book value per share will be $1,358. That increase in year 20 will be $226. That's 20% growth on the book value in year 19.

A price earnings ratio, earnings per share, that is 226. Put the price earnings ratio of 15 onto that Facebook's stock price. If they compound, I'm not saying they will unlikely, but just an example of what investing really is. At a PE ratio of 15. You are at a stock price of 3390. So the difference in annual returns over 20 years. It's either 18.1% or 16%. So that's 2.1% difference. So the difference is actually just 54 bucks, 54 bucks between buying Facebook and 174 or at 120. Compare the 54 bucks cost to the 3390 that you could get out, or that is just 1.5% of the sum.

So next time when you start freaking about buying something 20% higher, 20% lower or you missed the bottom, or fear of missing out, just think about buying great businesses. And I have a PhD on investing where I use GARCH, Arch, EBITDA, weighted average cost of capital, all those formulas, Beta, I analysed it all to get my PhD. I've worked for Bloomberg did research there, corrected their data. I was an accounting professor. And that's all the work class because that's all about those short term prices.

EMH

You simply follow what my grandmother used to tell me. When you have the money, you buy What's good, that's it. And if you follow your grandmother's advice, probably the same advice, call your grandmother, then you hear that's investing. In something's good, you buy it. That's it. And that's what I do when I have the money. I look at little bit of research a little bit and then I deploy it when I find something that I'm happy with.

Let me show you. So I have three portfolios, four portfolios that I manage on my research platform, pretty similar portfolios, but on one portfolio when I add 1000 each month, and then you see here two purchases on March and I didn't make a February purchase, I made it on the second of March and on 16th of March. However, the lump sum portfolio I keep that 20% in cash for great opportunities based on market volatility. And you can see here how sometimes I take profits.

So portfolio trades up 10% in three months, so took profits there. Then again one portfolio transaction where I took some profits and then I was 20% in cash going into this crisis and then you see my purchases, 3 March, 14 March, 20 March, 6 April, and 6 April. Now I'm 100% invested and I'm looking to invest invest a little bit more on safe leverage because I really like the investments in there.

Also, I had some money that we gained from our real estate purchase, decided not to invest in real estate because I can get better returns here. And here you can see my personal money that I transfer where the opportunities are, also purchases 16 March, 8 March, 8 April, so I buy something when they return on investment is good for me, when it fits my requirements and that's it. So when you have the money when you find something good. You put it in there and you forget about it.

Lump Sum Investing: Conclusion

That's all there is about investing, timing the market. That's just media and don't get fooled by the media. I'm really shocked when I say this when CNBC does its annual interview with Warren Buffett constantly over the whole two hour interview. It's always talking about the daily moves of the market. And Warren Buffett, poor Warren Buffett constantly discusses long term investment, how he doesn't know where the market will be in the next month, year and they constantly change implied open, where will be the open, where will it go? Where will it go?

Because that's what the media is selling you. And what I'm trying to tell you is just focus on finding good businesses that fit your investment requirements. Put your money in there and forget about it, go do something else. Go spend time with your family, the business will work do the work what it is supposed to do. So focus on businesses not that much on stock prices. The only outcome of focusing on stock prices is that you go crazy sooner or later sell in panic, lose a lot of money, and you never want to look at stocks again. Then you unsubscribe for this channel, you don't want to listen to me. You don't want to have fun on this channel. You don't want to invest in good businesses. And you do yourself a financial disservice for eternity.

So subscribe, click that notification bell. I'm looking forward to comments. Is this shocking? This mindset, this real investment mindset. Let me know in the comments, thank you check everything what I do as always on my website, and I'll see you in the next video.

The post Lump Sum Investing vs Dollar Cost Averaging Strategy! appeared first on ValueWalk.

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Spread & Containment

Will Powell Pivot? Don’t Count On It

Stocks are rallying on hopes that Jerome Powell and the Fed will stop increasing interest rates this fall, pivot, and start reducing them next year. For…

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Stocks are rallying on hopes that Jerome Powell and the Fed will stop increasing interest rates this fall, pivot, and start reducing them next year. For fear of missing out on the next great bull run, many investors are blindly buying into this new Powell pivot narrative.

What these investors fail to realize is the Fed has a problem. Inflation is raging, the likes of which the Fed hasn’t dealt with since Jerome Powell earned his law degree from Georgetown University in 1979.  

Despite inflation, markets seem to assume that today’s Fed has the same mindset as the 1990-2021 Fed. The old Fed would have stopped raising rates when stocks fell 20% and certainly on the second consecutive negative GDP print. The current Fed seems to want to keep raising rates and reducing its balance sheet (QT).

The market-friendly Fed we grew accustomed to over the last few decades may not be driving the ship anymore. Yesterday’s investment strategies may prove flawed if a new inflation-minded Fed is at the wheel.

Of course, you can ignore the realities of today’s high inflation and take Jim Cramer’s ever-bullish advice.

When the Fed gets out of the way, you have a real window and you’ve got to jump through it. … When a recession comes, the Fed has the good sense to stop raising rates,” the “Mad Money” host said. “And that pause means you’ve got to buy stocks.

Shifting Market Expectations

On June 10, 2022, the Fed Funds Futures markets implied the Fed would raise the Fed Funds rate to 3.20% in January 2023 and to 3.65% by July 2023. Such suggests the Fed would raise rates by almost 50bps between January and July.

Now the market implies Fed Funds will be 3.59% in January, up .40% in the last two months. However, the market implies July Fed Funds will be 3.52%, or .13% less than its January expectations. The market is pricing in a rate reduction between January and July.

The graph below highlights the recent shift in market expectations over the last two months.

The graph below from the Daily Shot shows compares the market’s implied expectations for Fed Funds (black) versus the Fed’s expectations. Each blue dot represents where each Fed member thinks Fed Funds will be at each year-end. The market underestimates the Fed’s resolve to increase interest rates by about 1%.

Short Term Inflation Projections

The biggest flaw with pricing in predicting a stall and Powell pivot in the near term is the possible trajectory of inflation. The graph below shows annual CPI rates based on three conservative monthly inflation data assumptions.

If monthly inflation is zero for the remainder of 2022, which is highly unlikely, CPI will only fall to 5.43%. Yes, that is much better than today’s 9.1%, but it is still well above the Fed’s 2.0% target. The other more likely scenarios are too high to allow the Fed to halt its fight against inflation.

cpi inflation

Inflation on its own, even in a rosy scenario, is not likely to get Powell to pivot. However, economic weakness, deteriorating labor markets, or financial instability could change his mind.

Recession, Labor, and Financial Instability

GDP just printed two negative quarters in a row. Some economists call that a recession. The NBER, the official determiner of recessions, also considers the health of the labor markets in their recession decision-making. 

The graph below shows the unemployment rate (blue), recessions (gray), and the number of months the unemployment rate troughed (red) before each recession. Since 1950 there have been eleven recessions. On average, the unemployment rate bottoms 2.5 months before an official recession declaration by the NBER. In seven of the eleven instances, the unemployment rate started rising one or two months before a recession.

unemployment and recession

The unemployment rate may start ticking up shortly, but consider it is presently at a historically low level. At 3.5%, it is well below the 6.2% average of the last 50 years. Of the 630 monthly jobs reports since 1970, there are only three other instances where the unemployment rate dipped to 3.5%. There are zero instances since 1970 below 3.5%!

Despite some recent signs of weakness, the labor market is historically tight. For example, job openings slipped from 11.85 million in March to 10.70 in June. However, as we show below, it remains well above historical norms.

jobs employment recession

A tight labor market that can lead to higher inflation via a price-wage spiral is of concern for the Fed. Such fear gives the Fed ample reason to keep tightening rates even if the labor markets weaken. For more on price-wage spirals, please read our article Persistent Inflation Scares the Fed.

Financial Stability

Besides economic deterioration or labor market troubles, financial instability might cause Jerome Powell to pivot. While there were some growing signs of financial instability in the spring, those warnings have dissipated.  

For example, the Fed pays close attention to the yield spread between corporate bonds and Treasury bonds (OAS) for signs of instability. They pay particular attention to yield spreads of junk-rated corporate debt as they are more volatile than investment-grade paper and often are the first assets to show signs of problems.

The graph below plots the daily intersections of investment grade (BBB) OAS and junk (BB) OAS since 1996. As shown, the OAS on junk-rated debt is almost 3% below what should be expected based on the robust correlation between the two yield spreads. Corporate debt markets are showing no signs of instability!

corporate bonds financial stability

Stocks, on the other hand, are lower this year. The S&P 500 is down about 15% year to date. However, it is still up about 25% since the pandemic started. More importantly, valuations have fallen but are still well above historical averages. So, while stock prices are down, there are few signs of equity market instability. In fact, the recent rally is starting to elicit FOMO behaviors so often seen in speculative bullish runs.

Declining yields, tightening yield spreads, and rising asset prices are inflationary. If anything, recent market stability gives the Fed a reason to keep raising rates. Ex-New York Fed President Bill Dudley recently commented that market speculation about a Fed pivot is overdone and counterproductive to the Fed’s efforts to bring down inflation.

What Does the Fed Think?

The following quotes and headlines have all come out since the late July 2022 Fed meeting. They all point to a Fed with no intent to stall or pivot despite its effect on jobs and the economy.

  • *KASHKARI: 2023 RATE CUTS SEEM LIKE `VERY UNLIKELY SCENARIO’
  • Fed’s Kashkari: concerning inflation is spreading; we need to act with urgency
  • *BOWMAN: SEES RISK FOMC ACTIONS TO SLOW JOB GAINS, EVEN CUT JOBS
  • *DALY: MARKETS ARE AHEAD OF THEMSELVES ON FED CUTTING RATES
  • St. Louis Fed President James Bullard says he favors a strategy of “front-loading” big interest-rate hikes, repeating that he wants to end the year at 3.75% to 4% – Bloomberg
  • FED’S BULLARD: TO GET INFLATION COMING DOWN IN A CONVINCING WAY, WE’LL HAVE TO BE HIGHER FOR LONGER.
  • “If you have to cut off the tail of a dog, don’t do it one inch at a time.”- Fed President Bullard
  • “There is a path to getting inflation under control,” Barkin said, “but a recession could happen in the process” – MarketWatch
  • The Fed is “nowhere near” being done in its fight against inflation, said Mary Daly, the San Francisco Federal Reserve Bank president, in a CNBC interview Tuesday.  –MarketWatch
  • “We think it’s necessary to have growth slow down,” Powell said last week. “We actually think we need a period of growth below potential, to create some slack so that the supply side can catch up. We also think that there will be, in all likelihood, some softening in labor market conditions. And those are things that we expect…to get inflation back down on the path to 2 percent.”

Summary

We are highly doubtful that Powell will pivot anytime soon. Supporting our view is the recent action of the Bank of England. On August 4th they raised interest rates by 50bps despite forecasting a recession starting this year and lasting through 2023. Central bankers understand this inflation outbreak is unique and are caught off guard by its persistence.

The economy and markets may test their resolve, but the threat of a long-lasting price-wage spiral will keep the Fed and other banks from taking their foot off the brakes too soon.

We close by reminding you that inflation will start falling in the months ahead, but it hasn’t even officially peaked yet.

The post Will Powell Pivot? Don’t Count On It appeared first on RIA.

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Why You Should Not Worry About Disney and Netflix Stock

The two streaming giants have struggled but investors should not be too concerned.

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The two streaming giants have struggled but investors should not be too concerned.

During the lockdown/quarantine days of the pandemic, we all apparently rode our Peloton (PTON) - Get Peloton Interactive Inc. Report bikes while binge-watching streaming videos. As soon as we finished that, we headed onto a Zoom Video  (ZM) - Get Zoom Video Communications Inc. Report call, presumably before ordering food delivery and later having a Teladoc (TDOC) - Get Teladoc Health Inc. Report appointment

That may not have actually been your direct experience, but it's how the stock market performed. People bought so-called "stay-at-home" stocks because we all were, well, stuck at home. Of course, at some point we weren't stuck at home, and sentiment on those stocks changed.

The challenge for investors is sorting out the real narrative from the false one. 

At-home-exercise bikes were never going to replace gyms once people could go out again, and the audience for a premium-priced product was limited when gym memberships can cost as little as $10 a month.

Telemedicine has a bright future, but it has limits and it may prove an area where the brand name does not matter.

Streaming video is different, however, and while Netflix (NFLX) - Get Netflix Inc. Report and Walt Disney (DIS) - Get The Walt Disney Company Report stock are down roughly 40% and 55% respectively over the past 12 months, there are a lot of reasons shareholders need not be concerned.

Netflix/TS

Netflix Has a Correctible Problem  

While Netflix grew steadily for a long time, no product has an endless upward trajectory. The company lost subscribers in its most recent quarter, but that comes after it added more than 36 million customers in 2020 and another 18 million in 2021. Even with its Q2 2022 drop of about a million subscribers, the company still has 220 million paying customers.

That's a huge number and it's not likely to get all that much bigger or all that much smaller over the next few years. The reality is that Netflix has left its growth phase and has moved into its fiscal responsibility phase.

Now, instead of producing $200 million movies and throwing them at the wall, the company has to be smarter about its content investments.

"So our content expense will continue to grow, but it's more moderated as we adjusted for the growth in our revenue," Chief Financial Officer Spence Neumann said during the company's second-quarter-earnings call.

"And we think we've gotten a lot smarter over the last decade or so being in the originals business as to where we can direct our spend for most impact, highest impact, and highest satisfaction for our members." 

Nobody at Netflix wants to say "we're going to make fewer shows and focus on having hits," but Netflix has reached the retention stage of its business. It needs to have enough content its customers want to see coming up to keep people from quitting.

That may not be an easy transition, but it's one the company is likely to make, where it can be comfortably profitable around its current customer base. 

Disney Has Nothing to Worry About     

Disney is obviously much more than a streaming company, but Disney+ has been a massive driver for the company. Its growth was accelerated by the pandemic, but every family and any adults who like Marvel and Star Wars were always going to subscribe.

Fans of the company's huge franchises are simply not going to skip the biggest shows coming out of those universes. 

Disney, unlike Netflix, does not have a too-much-content problem. It knows its customer base and understands that while "Falcon and the Winter Soldier" might draw a bigger audience than "Ms. Marvel," both drive audience to the service.

Disney may struggle with what's a theatrical release and what goes to streaming, but it has hit franchises that have stood the test of time. That's not going to change just because lockdowns have ended and we have other entertainment choices.

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Stocks

Bed Bath & Beyond stock should be worth $4 only: Baird

Bed Bath & Beyond Inc (NASDAQ: BBBY) has been on fire over the past couple of weeks, but that “frenzy” is unlikely to last for very long, says…

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Bed Bath & Beyond Inc (NASDAQ: BBBY) has been on fire over the past couple of weeks, but that “frenzy” is unlikely to last for very long, says Justin Kleber. He’s a Senior Equity Research Analyst at Baird.

Bed Bath & Beyond stock could tank 55% from here

On Tuesday, he downgraded the Bed Bath & Beyond stock to “underperform” and reiterated his price target of $4.0 a share that represents about a 55% downside from here. In a note to clients, Kleber said:

This frenzied move has been driven by non-fundamentally focused market participants. With market share losses accelerating and BBBY burning cash, fundamental risk/reward looks unattractive.

The meme stock, he added, has to sharply improve its EBITDA to justify its current $2.30 billion enterprise value – but that’s unlikely to happen in this macroeconomic environment.

Versus its year-to-date low, Bed bath & Beyond stock is currently up more than 100%.

Why else does he dislike Bed Bath & Beyond Inc?

In its latest reported quarter, the American chain of domestic merchandise retail stores lost $2.83 a share (adjusted) – more than double the $1.39 that analysts had expected. Kleber is also bearish on the Bed Bath & Beyond stock because:

Supply chain disruptions have exposed BBBY’s antiquated infrastructure and wreaked havoc on the business at the same time the company’s pivot toward owned brands has not resonated with customers.

The retailer will likely remain challenged as demand for home goods continues to normalise following two years of pandemic-driven boost, he concluded.

In June, the Union-headquartered company named Sue Gove its new CEO (interim) tasked with fixing the liquidity concerns. Most recently, Bed Bath & Beyond was reported considering private loans to optimise its balance sheet.

The post Bed Bath & Beyond stock should be worth $4 only: Baird appeared first on Invezz.

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