UBS’s Art Cashin rang the opening bell on the New York Stock Exchange to mark his 50th year trading on Wall Street.
So, what kind of wisdom does this veteran have for us after all that he’s seen?
He shared a time-tested strategy in an interview on CNBC:
“…one of the key things that people can do, particularly if they’re starting their investment plan, there’s something called dollar-cost investing, in which you set aside a certain amount of money, $200, $500, and you buy it every specified day. Every month, or every six months. And that way, if stock prices are down, you wind up with more shares, and if stock prices are too high, you don’t buy as much. So, dollar-cost averaging works out pretty well, and yes, the stock market continues to be a good investment.”
Cashin said this even as the S&P 500 was trading within points of an all-time high.
The brilliant thing about dollar-cost averaging is that it works very well even if the market is at a top.
We ran the numbers to see how an investor would’ve done had she started a dollar cost-averaging strategy right before the last market crash.
There’s A Correct Way To Buy Stocks If You’re Convinced The Market Will Crash
The stock market is great for investors who have the benefit of long-term investing horizons. It’s also better-suited for investors who aren’t concerned about perfectly-timing market tops and bottoms.
Having said that, taking a longer term view is good for investors worried that they may be buying at the top of the market.
A classic strategy called dollar-cost averaging can help reduce risks surrounding an asset falling in price. As described by Cashin, the concept is straightforward — you invest a fixed amount of money in an asset once every fixed time period. If the asset’s price drops, you will be getting more shares of the asset for the same amount of money, and so if and when the price recovers, you will have spent less per share, on average, than if you had bought the shares at their peak, pre-fall price.
Dollar-cost averaging isn’t about losing money as the stock market falls. It’s about buying increasing amounts of shares at cheaper prices, which means bigger returns during the rally.
How Dollar-Cost Averaging Worked Brilliantly During The Last Crash
To see this in action, we came up with a simplified thought experiment.
We considered what would have happened to an investor jumping into the stock market at the last peak: October 2007. This was arguably the worst time to buy. Our hypothetical investor puts $50 into a S&P 500 index fund at the start of every month, starting in October 2007 — the last stock market peak before the beginning of the great recession.
Here is what happened to the S&P 500 starting at that peak:
The index dropped more or less steadily until the worst moments of the financial crisis in fall 2008, causing the full on crash, and only began to turn around in March 2009.
The key to our investor’s experiment is that they are staying consistent. No matter how stock prices move, they will always put $50 on the first trading day of every month into the index fund.
Based on changes in the value of the S&P 500 index, we calculated our investor’s price return, less the $50 monthly cost:
The value of our investor’s portfolio as of December 1, 2014 is $6,896.30. If they instead had taken their $50 each month and held it as cash, they would have just $4,350. So, the price return on this investment — even though they started at the last peak, just before the market started to go downhill — is $2,546.30.
This is a respectable 58.5% return. That averages out to about a 6.6% annual rate of return.
To get another perspective on this, here is the percent gain or loss, compared to taking $50 each month and holding it as cash:
Things start out looking pretty dire, as the economy fell into its deep recession through mid-2009, with the S&P 500 reaching a minimum in March of that year. At the lowest point for our investor, at the start of February 2009, she would be down about 36%.
Because human beings are often overly risk-averse, our hypothetical investor might have been tempted to abandon their investment plans during the bad months. That is, they might look at this chart and panic about the drop:
But, if our investor sticks with their plan and keeps putting $50 in every month, even through the dark times, once the market bounces back, they end up doing quite well:
Here’s Why You Never Hear About This
Unfortunately, dollar-cost averaging isn’t sexy. It’s much sexier to sell at the top and buy at the bottom.
Obviously, your returns would be much higher if you win the stock market lottery by perfectly timing the tops and bottoms of the market. However, almost everyone who tries to do this will find themselves losing money and lots of it.
If you are investing for the long haul, and can hang on through watching your portfolio’s value drop temporarily in bad times, starting to invest in stocks, even near a peak, may not be as terrifying as it looks. The market has always bounced back sooner or later, so if you can hold on until that later, don’t panic.
From: Business Insider
Ray Dalio has been called “Wall Street’s Oddest Duck” for his highly unusual approach to management, but no one has ever questioned his brilliance.
He turned his company Bridgewater Associates into the world’s largest hedge fund, with $160 billion in assets, and amassed a personal fortune estimated at around $15.2 billion.
Dalio runs Bridgewater according to the theory of “radical transparency,” which means that all meetings and interviews are recorded and archived, and any level of employee is encouraged to criticize another if necessary. Every Bridgewater employee is given a copy of the 123-page manual he wrote on leadership.
It includes a section in which Dalio outlines the habits he believes took him from a lower-middle class childhood to one of the most powerful people in finance. We’ve summarized them below:
1. Working for himself and not just doing what others wanted him to do
Dalio writes that he hated school as a boy because he could not find practical applications for things he was forced to memorize. He decided that he wanted to be successful, requiring him to be motivated. And to be motivated, he had to work for himself.
He started delivering newspapers, mowing lawns, and caddying, and at the age of 12 he made his first investment in the stock market.
“All the work I ever did was just what I needed to do to get what I wanted. Since I always had the prerogative to not strive for what I wanted, I never felt forced to do anything,” Dalio writes.
2. Coming up with the best independent opinions he could to advance his goals
When he started investing as a kid, he began cutting out coupons from issues of Fortune magazine that could be mailed in for annual reports for Fortune 500 companies. He gathered as many as possible and took an amateur shot at figuring out the market.
It’s the same attitude he’s taken toward managing his employees. At this point, he’s used to Bridgewater being called cultish and weird, but he’s consistently responded by saying that the employees who work there naturally fit into the firm’s unique culture. And it’s certainly been working for them.
3. Surrounding himself with smart people and learning from the way they thought
Dalio says that as a novice investor, he started the habit of asking the opinion of anyone he deemed a somewhat savvy investor — his stockbroker, the people he caddied for, and even his barber.
“I never cared much about others’ conclusions — only for the reasoning that led to these conclusions,” he writes. “That reasoning had to make sense to me. Through this process, I improved my chances of being right, and I learned a lot from a lot of great people.”
4. Being wary of overconfidence and limiting exposure to high-risk situations
Dalio has grown Bridgewater so tremendously because he lowers his risk as much as possible before making a decision.
“Sometimes when I know that I don’t know which way the coin is going to flip, I try to position myself so that it won’t have an impact on me either way. In other words, I don’t make an inadvertent bet. I try to limit my bets to the limited number of things I am confident in,” he writes.
5. Reflecting on how he made decisions and figuring out why they led to either success or failure
A major portion of Dalio’s manual is dedicated to decision-making and analysis of results. He says that learning to appreciate failure early on was very valuable for him:
I learned that each mistake was probably a reflection of something that I was (or others were) doing wrong, so if I could figure out what that was, I could learn how to be more effective. I learned that wrestling with my problems, mistakes, and weaknesses was the training that strengthened me. Also, I learned that it was the pain of this wrestling that made me and those around me appreciate our successes.
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Quantitative finance started in the U.S. in the 1970s as some astute investors began using mathematical formulae to price stocks and bonds.
Harry Markowitz‘s 1952 Ph.D thesis “Portfolio Selection” was one of the first papers to formally adapt mathematical concepts to finance. Markowitz formalized a notion of mean return and covariances for common stocks which allowed him to quantify the concept of “diversification” in a market. He showed how to compute the mean return and variance for a given portfolio and argued that investors should hold only those portfolios whose variance is minimal among all portfolios with a given mean return. Although the language of finance now involves Itō calculus, management of risk in a quantifiable manner underlies much of the modern theory.
In 1969 Robert Merton introduced stochastic calculus into the study of finance. Merton was motivated by the desire to understand how prices are set in financial markets, which is the classical economics question of “equilibrium,” and in later papers he used the machinery of stochastic calculus to begin investigation of this issue.
At the same time as Merton’s work and with Merton’s assistance, Fischer Black and Myron Scholes developed the Black–Scholes model, which was awarded the 1997 Nobel Memorial Prize in Economic Sciences. It provided a solution for a practical problem, that of finding a fair price for a European call option, i.e., the right to buy one share of a given stock at a specified price and time. Such options are frequently purchased by investors as a risk-hedging device. In 1981, Harrison and Pliska used the general theory of continuous-time stochastic processes to put the Black–Scholes model on a solid theoretical basis, and as a result, showed how to price numerous other “derivative” securities.