Once again I will say, this is not any recommendation to buy or sell or any investment advice.
I have experienced this myself so I am just highlighting what I feel/felt about investments and waiting for crashes.
I've been sitting on pretty much cash for sometime already. Once again, this is not to say that this is the best strategy. This is what I think is suitable for me and my own situation.
Ok so basically, the idea is very simple.
If I hold cash and wait is that better? Or is staying invested better?
The below table illustrates better.
First scenario.
Person A holds cash and waits for a crash. In year 16, there is a crash and he gets into the market.
Person B buys some low volatility stocks with 5% return, dividend plus capital appreciation. He gets 5% return for 15 years, and year 16, there is a crash, he stays invested all the way.
There is minimal difference in return for both A and B even after 16 years.
Essentially, Person A can sit around and wait for a market crash for 16 years and he will match Person B. IF the market crash happens BEFORE 16 years, Person B will perform better than Person A.
After the crash the market recovers 20% per year for the next few years. Both parties will experience the same rate of return.
In the same reasoning, Person A can wait 9 years and still have the same returns as Person B.
And Scenario 3 is for 15% and Person A can wait for 7 years to have the same returns as Person B.
Now, no one knows when any market crash will happen. So there's obviously a chance for Person B to do worse than Person A.
This is an all or nothing scenario, for illustration, so there's of course options for them to be partially invested and all that.
Also, there is execution issues, cos no one knows where the bottom of the crash is so maybe it drops only 40% and Person A never bought and it recovers and Person A stays uninvested. If that's the case, then Person A is essentially screwed.
So there's a whole slew of problems with the sit and wait strategy. So to each his own.
For me, I was around during the Great Financial Crisis (GFC), 10 years back.
When the market dropped 20%-30%, I made my bets, then the markets continued to drop and I was sitting on huge losses. But no matter, they all recovered and I made a fair return on all of them.
The lesson I learnt was that sitting on huge losses was worse than missing out on a run.
A rise in 50% is very different from a drop in 50%.
100 +50% = 150
150 -50% = 75
Cos as markets continued to fall, I had no more money to continue buying.
So anyway, this is my lesson that I learnt and my own strategy. I've been sitting on pretty much cash for a while now, and probably missed out on a easy 30% market run since I sold off.
There's obviously the feeling of FOMO, fear of missing out, duhz, markets are running, they don't show signs of stopping, I'm sitting on mainly cash...
So this strategy has a whole load of other issues emotional, execution, calculation mistakes, etc.
So once again, I won't say this is the best strategy. For me, I'm waiting it out.
For you, make your own call.
I'm just sharing my thoughts and what I experienced during the GFC.
And what I think would work for me. Some people think this is a highly risky strategy prone to lots of human error. I agree.
So please, do not take this as any financial advice. Just read it as an idea/thought.
If you ever thought about the question whether to sit and wait or stay invested, the calculation is as simple as the table above, and the number of years to match off against someone who stayed invested.
But the execution and human error is impossible to calculate so that's entirely a different story.
ALSO, there's no reason to compare Person A and Person B. There is no reward for Person A to beat Person B or vice versa. As long as both of them fulfill their own financial objectives. That is sufficient.
If someone invested in Facebook vs someone who invested in DBS.
Doesn't mean that the person who invested in DBS has lost. It's just different investment objectives.
So please please please, don't take this as the best strategy.
I'm really concerned someone might think... "Oh ERSG has done this, might as well just follow him."
This is just the strategy I'm using for myself. It may or may not be suitable for other people.
It may be a terrible strategy and I am prepared to live with the consequences of missing out on a good run.
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