by elmads

INTRODUCTION

I’m thankful that I’ve been born in this era of technology, where the means of communicating with someone has been faster than ever. With just a few taps of our finger on our smart phones, we could reach our loved ones as far as the opposite side of the globe. We could also have our meals delivered at our doorstep via the online food delivery services, same as with product deliveries through online commerce.

Other industries have been heavily influenced by technology as well, such as the autonomous driving (automobiles), the Airbnb business model (hospitality), solar panels (clean energy production) and investing (finance).

Because of massive technological advancements, investing has been easier for everyone. The need for filling up forms in branch offices to open an investment broker account would eventually become a thing of the past. Instead, online registration is the new norm.

We can now transfer funds to our broker accounts via the internet, with less time and effort unlike required in our part unlike before. Not to mention that we can also now make buy and sell orders anytime. It certainly has never been this easy and accessible to invest. Before, investors were required to call their respective brokers just to ask them to execute a buy or sell order for a certain security.

The power to make money over time, through investing is now at the tip of our fingers, thanks to technology and the internet. Surely, these advancements have made everything faster and easier for us ordinary people of this world to invest, but there is still this one thing that technology hasn’t found to a century old problem yet. How to control our EMOTIONS.

The notorious killer of most investors’ long term investment success is due to our behaviour and emotions, rather than what we do not know about the markets.

THE MARKETS

The People, The Economy and The Markets. Why do the markets always go up over a very long period of time?

Humans are resilient beings, we tend to bounce back from adversities, may it be a war, cataclysmic natural disasters, or a deadly virus. We find ways to bear the problems and work things around it in order to come out stronger, more experienced and more knowledgeable about the world. This is the reason why our race has survived centuries of hardships. The same can be said with our economy. Remember, without each and one of us, there is no economy.

“The ultimate resource in economic development is people. It is people, not capital or raw materials that develop an economy”

-Peter F. Drucker

Probably you’re thinking, how does all of this relate to investing? my answer to you is, the capital markets. The markets consist of investors, traders and businesses who are in it to make money and raise capital. These endeavours are all happening in an economy.

Some investors say that the markets reflect the economy, but this is not entirely true, most of the time the markets deviate from the real economy. What is true is that the markets reflect what it thinks will happen in the economy in the future. If the future of an economy is optimistic, then the markets usually rise, if not then the markets fall, or just stay flat.

This has been strongly shown in 2020, during the lockdowns imposed in several countries due to the COVID19 pandemic.

The global markets were in turmoil due to the virus that was spreading like wildfire, causing both infection and death rates to spike globally. This resulted for governments worldwide to halt their economy and start lockdowns on their respective governed country.

If the economy is not moving, then productivity and income will also stop, hence a substantial decline. The global markets reacted violently from this, as it fell of the cliff at approximately 35%. Most people were at maximum fear, who wouldn’t be, when this generation has never seen this kind of virus that wreaked havoc globally. The last time such event occurred was in 1917, during the Spanish Flu, which most of us have not been born yet.

The fear sentiments continued until the whole year of 2021, but the markets surprisingly reacted differently since April of 2020. We saw a strong “V” shaped recovery from the markets, even when the virus infection continued to have a few more spike of cases, and was still having newer variants, within the 2020-2021 period.

As of this writing in year 2022, the markets continued to rally since April of 2020, and everyone was surprised back then because investors were expecting for the markets to drop more than 35% or stay within that lower price levels for a longer time. But it did not happen, the markets proved investors and traders wrong. The S&P 500 index (consisting of the 500 largest companies in the US) increased substantially. See the Market price chart down below.

The capital market is forward looking, even with the negative sentiments during that time, it still saw an economy that will recover with the help of vaccines. And, it actually panned out, just like what the stock market prices reflected during that time. Nonetheless, if the vaccines wasn’t successful as what people initially anticipated, then probably the markets would continue to go further down or stay flat at lower levels for a longer time.

In summary,

1.) The markets consist of investors and traders who have their own ideas and opinions. Regardless of what one person thinks of what may happen with the market prices, it’ll still be the collective group of investors and traders in the markets who will prove us if we are right or wrong. If it goes up, then that’s the majority of investors and traders saying that this is what they think, the opposite outcome is true as well.

2.) The economy comprises of groups of individuals, which is each and one of us. As long as we want a better and comfortable life, we will always find ways to make it happen. This in turn affects everything within an economy, including its resources, capital, and most especially us, the people. Humans are always resilient and we are survivors. If everyone of us thrives, so as our economy.

3.) Adding my points in numbers 1 and 2, will give us a market that is also resilient from catastrophic events. It may stumble occasionally, and may even stay low for a longer time, but it will always go up over a long period of time. It is jut the nature and cycle of people and its economy, the boom and bust cycle. It’s not a matter of: if we will have a recession, it is a matter of when.

Being consistently invested just means that we believe in humanity, despite the problems that we mostly brought upon ourselves, except for natural disasters. Problems that we always learn from, grow and eventually, we move forward from it.

THE COST AVERAGING METHOD

Probably you’re thinking again, how does the markets and one’s emotion all connect to the cost averaging investing strategy? it’s simple as this, the markets go up overtime, so if you’re in it for the long haul why stress about the down turns? Just invest religiously, consistently for a long period of time, every salary pay day. This itself takes away the stress and negative emotions in investing, not to mention that you could just keep on doing what you love to do in life without needing to understand the complexities of the markets.

If you still feel hesitant to follow this simple investing strategy, I could give you examples of the worst market downturns in history for the S&P 500 index, and how the Cost Averaging Strategy fared during that time. (To know more what is an index, check my blog titled “Active and Passive Funds” and “Mutual Funds”).

I’ll bring you to the past, in a time of the USA’s great depression era. What if you’ve started investing at the peak of the markets in 1929, then you just continued to invest consistently via the Cost Averaging Investing Strategy until the markets regained it previous price after 28 years. What would have been your investment returns? Let’s make a simulation.

Firstly, a disclaimer: this is only a simulation because there are a lot of factors that can derail one’s ability to invest, time horizon and consistency, like losing a job. Also, the fees from broker accounts and taxes are not included in this simulation.

Factors that needs to be considered first:

1.) I used the average yearly salary of the US workers as of 2021data, which is $50,000 according to the US’s Bureau of Labour Statistics (BLS).

2.) Initial Investment is $500.

3.) Yearly investment contribution is $5,000. This is 10% of the $50,000 average US worker’s yearly income as of 2021.

4.) I also included the effects of inflation on the investment.

In short, you’ve started to invest $500 at the start of the 1929, afterwards you’ve consistently invested $416.67 monthly (which is $5,000 yearly investment ‘$416.67 x 12’) on a mutual fund that copies the S&P 500 index. Here’s what happens to your investment during that period of time.

This was a turbulent time where a lot of people lost their jobs, they weren’t even able to provide the basic necessities for themselves and their families, and a very poor economic condition in the US. A great depression indeed.

Despite the substantial decline in the markets, doing the Dollar Cost Averaging Method all through out the great depression era would still substantially give us a positive return over time as we get to average out the ups and downs of the market. Not to mention the dividends we would have got during those 28 years.

I have another examples down below, with different long-term price crashes due to recessions.

Below is the Stagflation Era where price of oil and the inflation rate skyrocketed, while the production and manufacturing of companies slowed down and others halted. Basically, a stagnation of the economy while prices of commodities were rising, hence the word “Stagflation”.

The next one is the Dot Com Mania and The Global Financial Crisis. The former was caused by the hyper speculation of investors and traders with internet companies, causing a bubble that eventually burst. Whereas, the latter is due to the greed of banks to make more money through the housing markets.

There is this one thing in common on all the long-term crashes that happened in the S&P500 index, the markets eventually recovered and even went up higher than where it was before. This is the reason why Cost Averaging Investment Strategy works, it captures the good and bad times, including the dividends that the companies in the index give. It is a win-win situation for investors who are both consistently investing and has a long-term investment time horizon.

Furthermore, cost averaging method even fared well with inflation. The highest inflationary environment was during the stagflation era. Despite this, our investment simulation did well as it still gained money after inflation was factored in.

Time in the market, beats timing the market, and the earlier we start our investment compounding journey, the more our money will make more money for us.

EXTRA CONTENT – THE PHILIPPINE STOCK EXCHANGE INDEX

I keep on using the S&P 500 index as my get go for my examples, because the US market is the largest market worldwide. It is so large that 50%-60% of the “All World Index” comprises the US market alone.

That being said, I’ll also give you another index example just like the one I did above, which is relating to the simulation of the Cost Averaging Investing Method with different crises.

I’ll be using the Philippine Stock Exchange Index, which is the most followed index in, no other than the Philippines. This country is so close to my heart because I’m a pure bred and will always be a proud Filipino. I’m invested and will always be invested in the Philippine markets, in fact 25% of my overall investment portfolio is invested in the Philippines.

I’ll be using different crisis that has occurred in the Philippines, 1^st is the Asian Financial Crisis and 2^nd is the Global Financial Crisis, and an additional just a flat market from 2013 to 2020, and lastly from 1981-2020.

Factors that needs to be considered;

1.) I used the Philippine Pesos and a monthly salary of 15,000 PHP / or an annual salary of 180,000 PHP.

2.) Intial Investment is 5,000 PHP.

3.) Yearly investment contribution is 18,000 PHP. This is 10% of the 180,000 PHP annual income.

4.) I also included the effects of inflation on the investment.

NOTE: The returns computed here are only capital appreciation with no dividend gains, unlike with the S&P 500 index computations and scenarios that I did above. The reason why is, I couldn’t find any returns of the PSEi with dividends since 1981.

The Asian Financial Crisis

The Global Financial Crisis

From 2013 to 2020, a Flat Market.

TO SUM IT UP

For the cost averaging investing method to be successful, an investor must be in it for the long-term, consistently invests in an index and doesn’t care about the fluctuation of market prices.

Markets are and will always be erratic in the short run, but it in the long run it smoothens up into an upward movement and trajectory. The markets and the economy which consists of various people in different walks of life, can be irrational at time to time, but over a long period of time, humanity threads a path of learning, thinking, innovation, survivability, creativity, growth and ultimately success.

Invest, as investing alone is one of the vest ways to beat inflation. To make money work for us and in turn, helps us achieve our own financial goals and independence.

Knowledge is my sword, and patience is my shield

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.