Don't Bet on a Stock Market Crash (Do this instead)
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- Опубліковано 10 чер 2023
- When the headlines make the future seem so grim, it’s easy to think we must be in for another stock market crash.
It seems natural to want to protect yourself from it, and that sounds like an intelligent thing to do, but it’s not - let me show you why.
Of Dollars & Data - ofdollarsanddata.com/
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The urge to time the market is so strong I even have to remind myself of this data at times!
Time in the market, not timing the market is my mantra.
22% improvement is shockingly bad if that’s all you get with perfect performance. DCA (PCA) and chill seems to be the way.
@@mbgghh6543I love the stuff they do. I don’t know how those guys manage to do all their blogs and advise clients at the same time! I hope to do something similar in the near future.
Your evaluation doesn't include that you can hold cash in ticker CASH or a GIC (or their US equivalents). I'm not saying you are wrong, just that you missed one of the advantages of "cash" positions.
this is manipulated, because when you saved cash you would get getting interest from the bank if you invested your cash say at a 4% term deposit, yet you didnt bother mentioning this BIG fact sadly
This is incredibly valuable reminder . So difficult resist the temptation to time the market
Agree 100%! Time in the market not timing the market. Stock markets go up 75% of the time.
I have to rewatch your videos to remind myself. thank you.
My favorite financial youtuber. You can tell James is honest and has integrity
That's great to hear, thank you very much!
Absolutely agree. Valuable honest content.
Another superb video. You are right up there with the best on UA-cam.
Best summary explanation on the UA-cam!
Thanks very much for this James,.
I've always wondered how much of a difference the outcomes would be using those two strategies.
Loved the analysis of DCA v timing the market. 22% difference over 50 years. Wow. Didnt realize it was THAT small.
Fantastic video James, thank you
Great video James, even better delivery - as ever.
Just stay diversified…otherwise you may get a nasty surprise…
The charts presented ignore the effects of reinvestment of dividends, which increase the returns from stock market investments
This is an exceptional explanation 👏👏👏
I've often wondered about this and 22% is really pathetic for all the work you'd have to put in. You put out great stuff James, have a coffee on me
Thank you very much Mr Bashh, it’s much appreciated!
The market is volatile at this time, hence i will suggest you get yourself a financial-advisor that can provide you with entry and exit points on the shares/ETF you focus on.
i usually dont put comments, but man that video was exactly what i was looking for, and you explained it so good! you have a subscriber
Glad it helped!
thank you for a very interesting and insightful video. beginner here!
Thanks. A rare gem of a video.😊
Great vid . In fact possibly the most useful vid on yt
Thanks James. I’ve saved this video so as to rewatch and remind my future self of the puddly 22% delta. Loving your content!
Hi James, engaging video as always. Can you list some pros/ cons of £ cost averaging a portion of lifestrategy funds back from uk gilts into stocks, this would crystalise the painful losses, but could this be better than waiting for inflation to drop, and gilt value to return?
I really aporeciate you James. Please send me a link to the video you mentioned at the end. I could not see the pop up . Thank you🙏🙏🙏
Thanks @JamesShack - excellent and transparent description of the facts.
You’re welcome,
this is great, I love it!
Every time I watch one of your videos, I log into my Vanguard account and invest some of the cash I hold in there, so thank yo for those timely reminders!
YT algorithm seems to have worked for you, very clear and informative video, thank you James!! You have a new subscriber
I also highly recommend for anyone to read "the Psychology if Money " by Morgan Housel, who does mention this comparison of how timings the market doesn't work. Honestly it's a great read for anyone who would like to learn more about money
The 'timing the market perfectly' example was very interesting thanks... only 22%...crazy.
Seems misleading. The comparison leaves out the interest you'd get on your cash in all those years. Obviously you wouldn't keep it in dollar bills under your mattress. You'd have it in the best possible savings account.
Excellent video James
Glad you enjoyed it
The thing is we are in a very perilous situation at the moment, but as you say missing out on the final heat up. That said I believe in the next 5 years (most likely in the next 3) we will see a massive depression era type crash of at least 50-60 type falls. All of that said, i believr that politicians are going to take the cowardly way out of the massive global debt by continuing to print money, and our money will be worth less and less. So, for me the best investments are quality tangible assets like boats, houses.
Brilliant video!
James, excellent video. Two questions...
1) How do the figures in the "perfect knowledge" example change if the seller sells all assets at the top of the market, then buys back in at the bottom? I'm assuming at that point the 22% delta goes up dramatically?
2) Did the study in question compare this "perfect knowledge" model to a more realistic one where (say) 75% of the time the decisions were made to start buying again at the "wrong" point, before the market reaches it's all time low? If so, how does that affect the figures? Presumably at that point the "time the market" model performs way worse. How many of these decisions would you have to get perfectly right to break even?
OK, it was more than 2 questions, sorry... ;)
1) Yes, that would increase outperformance dramatically, but again, it's a pretty pointless observation because no one in their right mind would try to do that. Whereas everyone is tempted to buy the dip
2) The model did not look at that. But if the maximum upside is 22% any strategy that is anything less than perfect will be worse, potentially a lot worse.
If a strategy has a maximum potential upside of 22%, and you have to commit a huge amount of time and effort to it over 50 years... you would be mad to want to attempt it.
Especially when the downside risk is so large. You could find yourself sat in cash for years, if not decades, and lose out enormously.
This happens more than you'd think. Where people are either too scared of investing that they never start, or they start, take too much risk, get burned and never come back to investing again.
Very good advice On market timing. Almost every time I ring the register. And lock in profits.
The stock goes. up another 10% before I buy back in.
James, i think your videos are fantastic, informative, clear to understand and valuable lessons for all, thank you and keep them coming.
This is the best video I have ever seen. I love you content
I feel as though the example with timing the market falls somewhat short. I think most people that move to cash positions do so because they think the market is sitting on a cliff edge about to drop off the edge.
Timing the market in the sense used in the second example would mean that you would step out of the market right before a crash at the peak, and buy back in at the bottom.
That would surely result in significantly higher returns as in some cases you would preserve a significant amount of your principle on the sell.
Interesting and broadly correct.
However, you'll make more than 22% if you have "perfect timing". Whilst saving cash, you'll be earning the equivalent of 10 year treasury bond rate and compounding should help boost it further.
Alternatively, the best way to beat both being in the market and perfect timing, is the invest in "pure dividend" play. Hard to do before (Swaps - not available to small investors), but easier nowadays.
Also, it wasn't clear from the description, but the model sounds goofy. If you had perfect knowledge you wouldn't set aside money during the flat waterlines, you would rotate all capital out at each local peak to avoid drawdown
Excellent, and enlightening analysis. Having said that, at the risk of stating the obvious, one may point out that the optimal ("God like") foresight scenario illustrated is still not the optimal one. Because if you knew when the crash would happen, you would not only stop investing at the point to which the value will return. You would also sell during the higher value period until the next lowest (red line) point, and buy back at the discussed inflection. An comparison of this scenario with the same data would also be interesting - perhaps with two variants: a) sell at same rate as normal purchase until inflection, and b) sell all at the highest point and buy all back at inflection (best possible scenario). This may yield values something like +22%, +30% and +35%. I wonder...
Good video - I’d be interested to know if your base case performance would be much different on a monthly rather than daily payment schedule?
It would barely make and difference at all.
Great content as per. What sort of timeline is regarded as long term?
10+ years
Brilliantly explained
Thank you, I'm glad you found it useful!
mmm, i have moved to a cash fund to try to limit the efffect of a forthcoming crash, that was 3 months ago, now i dont know when to move back...
Perfect buy the dip .. where's the time ???
Part of the reason time in the market is so good, is you’ll be picking up dividends on the way. And then you use these dividends to by more of the stock.
This is also true.
This also applies to treasuries. After screening for DGI companies, I find their dividends are about the same as treasuries, but the market is riskier. Won’t mean I won’t buy them when the CNN Fear and Greed Index hits Fear, though!
@james what about keeping 20% of your wealth in bonds that you can use to firepower your pot after a market crash and then buy again bonds using the pot once it grows again? Can you test this strategy against any historic data? Thanks
Great stuff. This message can't be overstated, imho. Investing in stocks is profitable precisely because it's risky. As investors, we get paid to endure the stress that other people can't handle. If there were a way to avoid that pain by timing the market, stock investing would quickly cease to be profitable. Market panics are a feature, not a bug !
Couldn’t have said it better myself.
Thank you, this is the reality check that I needed. I KNEW this back in 2020 and kept investing, somehow I got sucked into the fear trade in 2022. Lost everything I made in 2020/21 by shorting. Luckily I didn't blow up, at this point I'm just breaking even with where I ended in 2019, but it still hurts.
With zero risk involved and over 20 percent Roi
Can you do the same $/day exercise with the Nikkei?
Great video, I personally am just more cautious, much of the exponential growth over recent years (as opposed to a crash) is due to the markets being flooded with imaginary bandaid money and millions of unskilled investors pumping the bandwagon without underlying data. These are unprecedented times. If panic should ever set in, the crash will be huge as many won’t hold their nerve and it will become crazy time. For now though, enjoy the good times! 😎
I don't fear a correction, what I fear is a fundamental shift in Global economics. There's a huge opportunity for small privately owned companies with digital assets which will no doubt steal market share from big corporates, this alone won't affect the markets, as prices to performance will just stretch, however, with many low birth years, lower employed (or greater proportion self employed) could have an effect. All this said, I'm still invested right now as I don't know of a better option.
Are you measuring market in a printable currency or a fixed measure like time gdp or gold..... just look at venezuela stock market
Amazing
Mental and emotional discipline… strength train them for future rewards 😅
Or you use Cycle Data ( eric hadik), Seasonal work(Larry Williams) +Sentiment..
Time in the market not timing the market
The timing the market example assumes that cash gives a 0% return while being saved. I'm not surprised that the difference is only 22%
What about dealing with large lump sums? Agree with dollar cost averaging etc, but what about if you've just sold a company, or won the lottery? Say it's a sum of money that you could realistically live off the proceeds. Would you just dump that into an index fund straight away? How would you deal with investing a one off large sum?
I’ve done a video on that here :ua-cam.com/video/lMYflVzok30/v-deo.html
I agree but how about the people that invested in 2020-2021? I’m one of those and my portfolio from back then is still down over 30%. So I’d say the truth is somewhere in the middle..don’t time the market unless there’s an once in a lifetime factor
Interesting concept but ignores a few strategies and not sure, but it's suggestive of buying an EFT or similar type fund and also ignores trading fees, literally investing $1 a day is not possible without massive fees, but it's illustrative so let's ignore that. But for example not investing for 3 or 4 months and saving those $1s to invest in a specific stock that looks like it may be at it's lowest point, eg Vodafone at it's lowest value since 1997 - might be a good time to invest. Also if you were to have perfect foresight you could sell your portfolio just before the crash and buy back in at the bottom. Also who wouldn't want an extra 22% return....? But I take your point, albeit it's slightly one dimensional.
I’m well versed in personal finance and financial independence and I found this one of the best video I’ve watched on the subject in ages. Excellent work
I'm not advocating for timing the market at all here, but the strategy illustrated here if you had god-like foresight wouldn't be the best you could do.
Selling at the peaks and reinvesting in the "intermediary dips" wasn't considered and would pull in a far higher return. But again, we dont have god-like foresight, and since the market trends upwards, it's not a good strategy to bet on dips, especially where those dips will start and end.
Your calculation is only correct if the time frame of your investment is long enough.
Some crashes could take years to recover and not everyone is on the same time horizon.
I like your explanation. But I still believe there are exceptions. For instance right now and recent past, when no risk interest investing, is used along side stock investments. Where you are getting a good to decent investment, while still participating in the market, but able to move more money in when we are not at all time highs with no data to support it. I think you will find (although I don't have a crystal ball), that a more conservative approach will be at least as effective in the next year or so. For the same reason you (depending on your resources) don't want to stay in all stocks once you retire, in most cases.
One challenge I see with these (very enlightening, no doubt) exercises: they assume people will keep investing the same amount over 50 years while the salary would have gone up by (say) 3x during that time and people would change their contributions to the stock plan.
its all mental when you invest.
Hi James, only my second comment ever on a youtube video but wanted to show my appreciation to you. Great video as always, if you ever wonder as to the appetitie of your audience to watch your content, personally i can tell you id watch any video you posted, monthly, weekly, daily :). In terms of content I had a question for a potentjal future topic. I watch two types of financial planning content on youtube, using a bad analogy id call it "turtle and hare." I want to be a turtle, making the most reasonable investmemt decisions for the long term (and it was your channel that got me started on my investment journey (thank you)), but recently I've become captivated by the hare, ie investing in popular big tech firms that took a kicking in 2022 but have returned great results in 2023. When i see my "hare" investments massively outperform my "turtles" (index funds), how do I most reasonably judge that I've strayed too far from "reasonable investor" to "short term gambler"? Not sure thats an easy question to answer or video to create, but its one perhaps a number of us are wondering. All the best for you and family and good luck on continuing to grow your channel. Alan
Hi Alan, thank you for the comment. I’m glad you’re learning more about investing. As long as your only keeping it to
Perfect timing only produced a 22% gain? I expected much more. Didn't Benjamin Graham, and J Boggle recommend adjusting asset allocation to stocks and bonds?
Rebalancing.
@3:30 is there a word for this "Never drops below again" point? I'm calling it my glue point or sticking point. Aha, Low Watermark.
I can time the market but for others. I can almost guarantee thay everytime I make an investment the price will almost certainly drop afterwards. Ive even thought about announcing this haha
Everyone saying for ages the market is going down - I put a quarter of my pension in the big tech stocks when they crashed last year - am reaping the rewards now - my financial advisor on another part of my pension has made 0.9% in that period
Great video though James averaging in over the long term is the right strategy but having a large lump sum to invest is a different matter
I can also quote many other super investors that held half or more of their cash when the market crashed and came out big. so meh...
James, do you have a private online financial advice platform?
You can find out more about working with me via the link in the description of the video.
The comparison at the end is with regular investing. Instead though how about investing a lump sum once at a high point compared to at a market low point?
The end difference will be whatever the difference is between the high and low points.
In my 50s now, I was one who thought it was too late until discovering the possibility of investing, I will be able to invest about 1K a month. Stocks and shares Isa or pension, which is best? I get tax relief on pension contributions but when it comes to drawing down it is taxed as income, whereas I can make withdrawals from the isa tax free, is it swings and roundabouts or will one grow much better than the other assuming same interest?
The first question to ask yourself is what to do you want to do with the money you invest do you want to grow it as capital or use it as a means to generate income?
@@salguodrolyat2594 I want to drawdown or withdraw 15 to 20k per year to add to my state pension income (in todays money).
During the perfect buying period, when the cash was being saved rather than invested, was any interest included in the calculation?
It does not. But the Dow Jones does not take into consideration dividends, which would improve the DCA strategy.
Can you just sell as soon as you see an abrupt drop. It shouldnt matter if that's a real fall or not, because if not you can just buy everything again can't you. If it turns out to be a real fall, happy days, you're saved. So basically every time you see a bit of drop, sell all immediately. Then wait for the drop stops, then buy them back all. Perfect strategy isn't it? I may be awarded a Novel prize.
While I agree with you, this calc has a bias on sequencing risk. If we look at that 12 year period from 1997 to 2008, it will probably be a diff story. Most people won’t be investing for 50 years either. And so the diff may be larger irl, if you really can time the market.
If I had perfect information, I wouldn't just buy on the way up, but short on the way down.
I'd be up 220% compared to DCA
Tbh i started investing during the covid crash...accidentally timed perfectly.
In the senario of "God-like" market timing, does this hypothetical investor just park the cash or put it into a money market?
For some reason people love fear.
This is one of the many reasons I just save a very small amount every month into a Vanguard Life Strategy. I don’t have the intelligence, knowledge, time or interest to work out what i should do so i’ll hand over responsibility of that to someone else and if it costs me then so be it.
I'm less than 1 min into this video. Time IN the market is better than TimING the market. Isn't that the first rule? Or one of the first rules? "Oh, I don't want to buy TSLA, Polestar are much better. Oh, NFLX will lose customers with their shared password policy" "I'll wait and see if NVIDIA make any good graphics cards this quarter...."
And that holds true right up until a market correction caused by an actual disruptor happening, such as AI getting better.
If you are sure that a company's business model has been seriously impacted by a recent change then you'd be stupid to hold on forever as it goes down. Because stocks don't only go up.
General market downturns have always recovered, so buy as it goes down generally works. But betting everything on Tesla and then watching it all go down because they were once the only real electric car manufacturer and now they have half the market share they once did and are being squeezed by luxury competitors, mass market competitors and performance competitors, would be very silly.
You shouldn't disregard things like company earnings, or shareholder meetings or new technology, CEO letters or whatever just because "you can never time the market or know anything" that's reductive.
You can just put everything into the all world index and hope the world is making more money in the future when you sell, however someone out there is still going to have to pay attention to the states of companies and their business models to know what stocks to buy and sell within that index.
Point being even if you buy and hold, trying to not time the market, the person managing your S&P500 will still do it anyway.
However as shown even if you were perfectly omniscient the returns aren't that much better, so you may as well not risk the 99.999% chance of getting it wrong.
Wish I've seen this video like 5 years ago 😅
6:25 to be fair, the strategy only bought at the best possible time. If someone could predict the market perfectly, they would have bought at the lowest then sold at the peaks, potentially doubling the 22%. Of course, 44% still isn't as big a difference as people would expect.
7:10 Greedy, fearful, or a third possibility: stupid. 😁
And... The market has crashed.
Oh cmon that example is shocking! So we're hiding the cash under the mattress and not earning the risk-free rate? It's meaningless, 0.4%/year. Do a back test when you buy bills or gilts and compare. The test is rendered even more inert by only dealing with nominal values. Economics is not absolute, it's relative, the figures with real meaning are real returns - relative to inflation
While the general point is true, this doesn't mention that right now a money market fund or even a bank savings account can easily get you above 5%+ for next to no risk. If your investment horizon is 5 years or less this is very appealing.
If your investment horizon is less than 5 years you should probably not be investing in the stock market.
If you would have invested 1999-2009 you would have made zero…except your own contributions. Age life expectancy etc… plays a role in investment decisions
The exception that proves the rule. Historically, the S&P 500 has been positive in 95% of 10 year rolling periods.
It shows stock market real returns
Hi James. Thank you so much for this amazing video. So encouraging to see real life data compared with the average joe’s tactic.
Just need to invest invest invest.
But there was a crash in 2020 - did Icahn miss that???
That's not a fair comparison. You are just assuming you would be stuffing the cash in a jar when it's not invested in the stock market. If it was instead buying bonds, the returns would be much higher. Even if not buying the perfect dips. On a yearly basis the 10 year treasury beat out the S&P500 37.5% of the time. (from 1926-2020) . Also trying to time the treasury bond market is a much more reasonable thing.
Last year I invested 1/2 my isa in balanced fund and it has grown by 3%. The other half I used to drop in and out of the market ( buying the dips and selling the highs)with a sp500 etf and it has grown by 11%. So you can buy the dip, but the downside is you need to spend at least 1/2 hour every day keeping up to date with all the market data etc and you need to be able to ride the emotional rollercoaster that comes with it.
A huge mistake in your assumption is that people put money away the entire time and do nothing with it. There are other less risky investments to make during that time. More likely, people will just rebalance their portfolio to invest more in bonds or other less risky investments during times of turmoil. Smart investors would move their money to less risky investments when the VIX and the fear index is high. Nothing wrong with hedging it when the situation is wrong with that strategy. People may say its "timing the market" but if I suspect the market may make huge corrections in a year or so, there is nothing wrong with taking some money off the table. My typical strategy is to convert some of the investments to cash or less risky investments and continue to buy at set intervals. If the market drops, you can move the money from the less risky environment back into stocks. If stocks go up the roof, you still have a portion in the market. You may have made as much as if you're fully invested, but you're also not completely out of the market. In 3-6 months, you reassess the market and determine if you need to rebalance again. Its called hedging. Heads, I win. Tails, I win.
That was great information - thanks
The dynamics of this analysis is wrong. We all have mortgages… and if we don’t, we have the opportunity cost of buying bonds at 5-10%.
So when you are waiting for a drop… you are earning 7%.
The question you have to ask yourself is can I outperform 7%… and is the outperformance worth the risk premium.
I am not going to borrow money at 7%… for a 9% gain.
No one includes the cost of capital in these analyses.
And when you paying off your mortgage… the savings you get are TAX FREE…
That doesn't seem real
timing the market is fools game. prudent investing is the best way.
dollar cost averaging and compound investing makes more returns then any other strategy in the world.
day trading is for speculators, not for the average joes which is like 99.9997% of the population. get it now?
The market will not crash it will bull back at best
this is so incredibly wrong. Perfect timing of the market wouldn’t be going to cash at the times you showed. It would ride market up to all time high and sell before it corrected to the points you showed, while holding cash during this time. Also index timing is not ideal. Timing the market is more rewarding on more volatile assets like tesla stock. I use the 9-18 ema crossover. Backtest from 2019 to now beats buy and hold on return and drawdown. This has a lower std dev of negative returns which allows you to apply leverage to magnify return while still having lower drawdown than the s&p500 over same time period.
154% CAGR for ema vs 62% for buy and hold.
I understand what you are saying, and it makes sense. However, this channel is really aimed at the 99.9% who aren't professional (or semi-professional) investors, and don't have the degree of knowledge and willingness to do research that you are talking about. For these people time in the market via a £/$ cost averaging strategy is likely to be the best as a) they can understand it, b) there is way less decisions to make, therefore fewer opportunities to get it wrong, and c) it is based on a regular habit of investing little and often, whish is something people can train themselves to do. Having the discipline to do the kind of research (and invest in the tooling that you probably have) is well beyond most peoples willingness.
All of this analytics goes to a trashcan if we already passed the historical peak, and stocks will keep falling for decades.