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While I am unable to give you a definite answer on whether or not you should “average down”, as all investors think and do things differently, and are unique in their own ways, but there are a few things (3 in particular) you can ask yourself which I hope will help you make the final decision.
Before I reveal what these three things are, let me first talk a bit about what does “averaging down” mean (for those who may be hearing about this for the first time) – in layman terms, it simply mean you increase your shareholdings in a company that is currently trading at a lower price, and in so doing, you bring down the average price of your shareholdings in the company.
To explain this with a simple example, let’s say you originally have 1,000 shares of Company A at S$10.00. However, the share price of Company A is now trading at just S$5.00, and the act of “averaging down” means you increase your shareholdings in Company A at its current trading price; assuming you decide to buy another 1,000 shares at S$5.00, then the average price of your shareholdings in Company A becomes S$7.50 now, which can be calculated as follows:
Initial Purchase: 1,000 shares x S$10.00/share = S$10,000
Additional Purchase: 1,000 shares x S$5.00/share = S$5,000
In total, you have now invested a total of S$15,000 in 2,000 shares of Company A.
As such, your average price in Company A is S$15,000 divided by 2,000 shares = S$7.50
Now that you have a better understanding of what “averaging down” means, let me share the three things you can look at to help you decide whether or not you should do so:
On Monday evening (16 March 2020), Malaysia’s Prime Minister Muhyiddin Yassin announced the lockdown of Malaysia for a period of 14 days (from 18 March to 31 March) in a bid to stem the further spread of Covid-19 in the country.
Almost immediately, I read about news of fellow Singaporeans rushing to the supermarkets (even though its already late into the evening) to sweep them clean of fresh produces out of panic that supplies in Singapore may be cut as a result of the lockdown in Malaysia (as many of our fresh produces are imported from the country.)
I see some parallels happening in the stock market as well, especially over the past two weeks, where I see many investors emptying their portfolios and rushing for the exit doors out of fear.
I know your portfolio is in a deep sea of red, but what I want to tell you is this – you’re not alone. Many investors are also suffering from a huge unrealised loss in their portfolio, myself included (as at time of writing, my long-term investment portfolio is down by 20.0%.) And in case you might be thinking I am a “veteran” in investing, I only have about 2+ years of experience as a full-time retail investor, and this is the first time I’m experiencing a stock market decline like this (I hope that after hearing this, it makes you feel better.)
Before you make any rash decisions, I suggest you calm yourself down, and ask yourself the following 4 questions:
1. Why are You Investing in the First Place?
I’d like you to recall the moment you make the commitment to invest – why did you make the decision?
Some may decide to invest because they want to build a high yielding portfolio (with yields higher than their CPF Special Account), some may be more focused on the eventual capital gain they could possibly get from their investments, while for some, it may be a mixture of both.
So, which group do you belong to?
2. Why did You Choose to Invest in those Companies in Your Current Portfolio?
I certainly hope your answer to this question is not, “because of hearsay.”
Prior to investing your hard-earned money in a company, I really hope that you have done a thorough research about it, and have a good knowledge of the company’s businesses, financials, debt profile, dividend payouts, etc. well enough before you make the eventual decision to invest in it. …
While there were some stocks that I have bought and sold off, most were done during 2016. There were hardly any position taken after 2017 so we can assume my portfolio as the aggregate of the 9 stocks and also it can be considered it as a buy & hold strategy with the holding period of 3.5 years.
Stocks.cafe provides the daily data of the portfolio time-weighted returns vs the STI ETF or ES3 which can be downloaded to Excel. I have plotted 2 graphs, the top is the my portfolio TII (in green) vs STI ETF (in Blue); the bottom is the difference between the 2 top lines.
The top graph first. The STI, since 2016, has moved within a window of -10% to +32%. The 2016 was quite flat; 2017 was a good year up 20%; 2018 was poor down -7%; and 2019 YTD is up 9%. The first point I want to make is if you are trying to trade during these 3.5 years which quite a lot of world events had happened. Well, you can try to hop in Feb 2016, enjoy the 2 years ride and get off in Mar 2018 and wait patiently for 9 months and get in back again around Dec 2018. Sounds simple but many will know it is not easy. When to get in, when to get out, how long to wait during in and out periods? There are just too many variables and moving parts to make sense of.
Time really flies these days when we are in our mid 30s, pegged by a combination of busy work and heavy loads of watching our children grow as each year past by.
I wanted to wrap things up for the year given that I will be taking a holiday trip to Bali with my family for the next few days until Christmas, and wanted to do a reflection of my equity performance this year before I then wrap things up for 2018 on an overall scale.
I received some good feedbacks last year on how I presented with my performance review, especially clearly positioning my winners and losers so I thought I’d continued with the same format for this year.
Please bear with me as this will be a pretty long post.
Overall Market Thoughts
This was a tough and rough year for investors because this was supposed to be an expansion year where interest rates are going higher because the economy is improving and there wasn’t a clear sign of global slowdown in the economy yet the market experienced some of the highest volatility we’ve seen in many years due to the trade wars and other stuff.
TIME WEIGHTED RETURNS VS MONEY WEIGHTED RETURNS
I think probably 70% of the people here don’t really calculate their returns.
Certainly not the traders with multiple transactions, cos it is a mammoth task doing so.
The vast majority of the remaining 30% are probably calculating it wrongly (Wrongly, that is, if you are using your ROI and comparing it to active managers)
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Serious investing requires the investor to do his homework.
Every piece of homework done needs to follow a structure. Like the great Benjamin Graham and Warren Buffet, great investors always have a plan.
Like the saying goes…”Failing to plan, is planning to fail.”
This is the workshop that teaches you how to plan your portfolio, by first creating the most crucial part of the plan: the checklist.
Whether you’re a totally newbie or an experienced investor, having a solid investing checklist is necessary because it will set the criteria, tone and structure to pick the best stocks and also manage the worse threat faced by investors when it happens – Fear.
In this session, we will share with you how you should build your own portfolio using this 10-step checklist.