Hi Kaifen, it seems like a very run of the mill question and Yang Teng answered some parts of it but if I read between the lines then I am thinking that you are a pretty sophisticated investor and know that waiting for a 10% or 20% correction in markets is a terrible strategy.
As you know, they normally don't happen oftern and you lose a lot of money in opportunity cost versus if you remained invested throughout as markets always tend to move higher and if you just wait for those big corrections, even the bottom of that correction is likely to be higher than when you began waiting for that correction!
So yes the 3-5% corrections sounds like it will happen more often and it could be a great "buy the dip" strategy. However, if you actually look at long terms statistics and I am basing this on my memory and I haven't seen recent statics on it, but statistics will show that even a 3~5% corrections has not occured alot in history and especially not alot since the Global financial crisis.
I would bet that you would probably be have been better if you had remained invested from the get go again. Just like DCA never beats lump sum in a rising market and especially post-GFC. So if you want to use that strategy, then I would use it at a tighter threshold of maybe 2% but basically most statistics will probably show you that in recent times lump sum investing always does better.
The reason people tout dollar cost averaging as a method is because the way we save and invest is largely from our monthly income and we want to have discipline in investing and so saving and investing from our monthly income through regular savings plans that results in dollar cost averaging gives us peace of mind, a system that works, a financial plan that is robust, and something that will not be derailed by markets moves and fixes our behavioral problems. So in that sense, it is a great stategy for us all.
Hi Kaifen, it seems like a very run of the mill question and Yang Teng answered some parts of it but if I read between the lines then I am thinking that you are a pretty sophisticated investor and know that waiting for a 10% or 20% correction in markets is a terrible strategy.
As you know, they normally don't happen oftern and you lose a lot of money in opportunity cost versus if you remained invested throughout as markets always tend to move higher and if you just wait for those big corrections, even the bottom of that correction is likely to be higher than when you began waiting for that correction!
So yes the 3-5% corrections sounds like it will happen more often and it could be a great "buy the dip" strategy. However, if you actually look at long terms statistics and I am basing this on my memory and I haven't seen recent statics on it, but statistics will show that even a 3~5% corrections has not occured alot in history and especially not alot since the Global financial crisis.
I would bet that you would probably be have been better if you had remained invested from the get go again. Just like DCA never beats lump sum in a rising market and especially post-GFC. So if you want to use that strategy, then I would use it at a tighter threshold of maybe 2% but basically most statistics will probably show you that in recent times lump sum investing always does better.
The reason people tout dollar cost averaging as a method is because the way we save and invest is largely from our monthly income and we want to have discipline in investing and so saving and investing from our monthly income through regular savings plans that results in dollar cost averaging gives us peace of mind, a system that works, a financial plan that is robust, and something that will not be derailed by markets moves and fixes our behavioral problems. So in that sense, it is a great stategy for us all.