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Drip-feeding - losses now, gains later?

Investment discussion for beginners. Why you should invest your money, get help getting started
tonyreptiles
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Drip-feeding - losses now, gains later?

#329789

Postby tonyreptiles » July 30th, 2020, 5:23 pm

Hi Everyone

I've been reading and watching a lot of stuff as part of my research into investing, and I'm wondering if I understand the pros and cons of drip-feeding properly. (For the record, I'll be investing in an index tracker, likely within my ISA allocation.)

I understand that investing a lump-sum during a bull market will outperform drip-feeding the same sum during that time. I think I get that well enough.

It is investing during a bear market that I'm not sure I understand correctly. I was originally concerned that drip-feeding during a bear market would simply mean watching your money magically disappear as the market falls. However, unless I am interpreting the information I read badly, there is a major upside to drip-feeding your portfolio during a bear market. Here's what I think...

By investing incrementally, for example, £1000 per month for 12 months as the market falls, you're able to buy shares at an increasingly cheaper price. Each month the share price falls, I'm able to buy more shares with each £1000 I spend.

If I'd invested a lump sum in one go, I'd have simply bought shares at a more expensive price and not benefitted from the cheaper price they were available at in subsequent months later in the year.

That means, by drip-feeding, I'll have bought shares and relatively cheaply, compared with the lump-sum investor, and accrued a greater number of shares for my money. Then, as the market (eventually) upturns, I'll have more shares, and therefore, make more profit than if I'd invested my lump sum in one go. I realise I can't time the market, but I like the idea of stocking up on relatively cheap shares.

In short, drip feeding during a downturn offers an opportunity to buy shares at an increasingly cheaper price, and this is great so long as we are happy to sit and wait it out long enough for the market to turn upwards again.

Does that sound like sense?
Have I missed anything?

TIA
TR

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Re: Drip-feeding - losses now, gains later?

#329793

Postby dealtn » July 30th, 2020, 5:28 pm

tonyreptiles wrote:Does that sound like sense?
Have I missed anything?

TIA
TR


Yes, makes sense.

I guess the bit you "missed" is you only ever know in hindsight whether you are in a Bull or Bear market. If you ever knew you would act accordingly.

Psychologically if it turns out to be a bull market, most people if they drip feed, when they could have lumped sum at the beginning are sanguine that at least the market went up, and they made money (although there is an opportunity cost and they could have made more). If it turns out to have been a bear market they are happy, as they "lost less" and the strategy worked.

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Re: Drip-feeding - losses now, gains later?

#329797

Postby Alaric » July 30th, 2020, 5:34 pm

tonyreptiles wrote:Have I missed anything?


If you can accurately time the turnaround, you do even better. That means sitting on your hands as the market goes down.

It's almost certainly not possible to time the turnaround with any degree of accuracy though. Perhaps the best that can be done is to have a target price below which you are prepared to buy.

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Re: Drip-feeding - losses now, gains later?

#329833

Postby LooseCannon101 » July 30th, 2020, 8:54 pm

When making an investment, I always work out roughly the final portfolio allocation to equity and also to cash. I then aim to reach that allocation within a set time frame e.g. 2 years.

As has been mentioned, a lump sum is best invested at the start of a bull market, whilst drip-feeding works well in a bear market. Unfortunately, no one can say for certain whether equities will rise or fall over the next year or two.

At times of market turmoil, it is usually pretty safe to invest a lump sum. When there are permanent blue skies as far as the eye can see, this is definitely not a good time to invest such a lump sum.

A compromise I sometimes make is invest half the lump sum at the start and the remainder drip-fed in over the next couple of years. Very rarely does the market do as so-called experts predict.

tonyreptiles
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Re: Drip-feeding - losses now, gains later?

#330335

Postby tonyreptiles » August 2nd, 2020, 1:06 pm

Thanks all.

I think my main question is querying my understanding that, assuming a bear market happens...

"by drip-feeding an index tracker/investment portfolio during a bear market is an OPPORTUNITY to buy shares at an increasingly discounted price - thereby acruing a larger number of shares which will rise in price when the market turns upward. It an opportunity to buy more shares than would be possible when buying during a bull market, thereby benefitting returns in the long run."

Are there any flaws in that statement?

Cheers
TR

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Re: Drip-feeding - losses now, gains later?

#330342

Postby JohnB » August 2nd, 2020, 1:42 pm

The longer you are in the market, the more money you are likely to make. But if you react badly to short-term losses, avoid lump sum investing and drip-feed. Don't calculate returns for timescales under a few years, and certainly don't obsess on what happened the few days after you invested, otherwise a hit will make you scurry away from the market and miss out on the upsides in future.

Oh, and don't drip-feed into ACC units unless they are in ISAs or pensions. The capital gains calculations will be horrid.

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Re: Drip-feeding - losses now, gains later?

#330379

Postby Bubblesofearth » August 2nd, 2020, 5:56 pm

tonyreptiles wrote:Thanks all.

I think my main question is querying my understanding that, assuming a bear market happens...

"by drip-feeding an index tracker/investment portfolio during a bear market is an OPPORTUNITY to buy shares at an increasingly discounted price - thereby acruing a larger number of shares which will rise in price when the market turns upward. It an opportunity to buy more shares than would be possible when buying during a bull market, thereby benefitting returns in the long run."

Are there any flaws in that statement?

Cheers
TR


There are no such things as bull and bear markets in equities.

BoE

tonyreptiles
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Re: Drip-feeding - losses now, gains later?

#330406

Postby tonyreptiles » August 2nd, 2020, 7:06 pm

Oh?

I thought a bull market was an upward trend and a bear market was a downward trend.

Have I got my terminology wrong? I'm guessing there must be a more nuanced definition?

TR

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Re: Drip-feeding - losses now, gains later?

#330460

Postby GoSeigen » August 3rd, 2020, 7:25 am

Bubblesofearth wrote:
tonyreptiles wrote:Thanks all.

I think my main question is querying my understanding that, assuming a bear market happens...

"by drip-feeding an index tracker/investment portfolio during a bear market is an OPPORTUNITY to buy shares at an increasingly discounted price - thereby acruing a larger number of shares which will rise in price when the market turns upward. It an opportunity to buy more shares than would be possible when buying during a bull market, thereby benefitting returns in the long run."

Are there any flaws in that statement?

Cheers
TR


There are no such things as bull and bear markets in equities.

BoE


This is unhelpful. Please re-read his use of the term in the OP. He is talking about a hindsight assessment. He's perfectly entitled to refer to the period when share prices have been rising as a bull market.

GS

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Re: Drip-feeding - losses now, gains later?

#330466

Postby GoSeigen » August 3rd, 2020, 8:03 am

tonyreptiles wrote:Hi Everyone

I've been reading and watching a lot of stuff as part of my research into investing, and I'm wondering if I understand the pros and cons of drip-feeding properly. (For the record, I'll be investing in an index tracker, likely within my ISA allocation.)

I understand that investing a lump-sum during a bull market will outperform drip-feeding the same sum during that time. I think I get that well enough.

It is investing during a bear market that I'm not sure I understand correctly. I was originally concerned that drip-feeding during a bear market would simply mean watching your money magically disappear as the market falls. However, unless I am interpreting the information I read badly, there is a major upside to drip-feeding your portfolio during a bear market. Here's what I think...


TR, BoE has a point that the effect of drip-feeding can't be predicted, the market will go up and down and as BoE tacitly admitted, the market might even go down "forever" i.e. long enough time that it is material to your investment objectives. This is a prime justification for thinking about diversification/asset allocation.

So, what you said makes sense, but you can't easily predict in advance what's going to happen. Or to be precise, you may have a good grasp of what will happen but it might not happen as quickly as you expected, be this some macroeconomic factor or the recovery of a company or the adoption of it's wonderful new product.

Having said that, here is my take on drip-feeding:
-there is no such thing as drip-feeding! What I mean is that if you view your investments with your asset allocation glasses on you simply have a large allocation to cash which is in itself an asset. I make this point because one should acknowledge that cash also has its benefits: you earn interest when it's on deposit, it is liquid, it always trades at face value (i.e. it doesn't fall in value) etc. So cash is valuable in itself: you are not "losing out" by not investing a lump sum: you are gaining from different advantages.

-acknowledging that you might feel you need to increase allocation to a particular asset, then your question is whether to do that gradually or all at once. For me, the main difficulty of investing, i.e. allocating your capital is deciding where it is best allocated. That is difficult because one can make mistakes firstly, but perhaps more pertinently, soon after allocating your funds you can feel like you have made a mistake. You may be right or you may be wrong but it's valuable either in reaction to events or mechanically to review your allocation decisions. And from a purely psychological point of view it is easier to decide whether to change course or continue when the stakes are not high. This is a double edged sword: if you decide to change allocation slowly then of course you have a larger allocation to the original asset and thus the stakes are higher when it comes to disposing of that asset (be it cash or something else)! So I don't see there's a clear-cut answer necessarily, but IMV change needs justification and review.

-in terms of how drip feeding should be used in practice, I try to follow the principles of the legendary Jesse Livermore: he used the behaviour of market prices to test his decisions: he would build positions gradually in small tranches: if after a purchase the price fell (keeping it simple) that would make him very cautious and question his decision, perhaps even reversing it, but certainly not adding to a losing position. On the other hand if the price rose, it would give him confidence in his initial assessment and he would then double up. I try to follow a similar principle: if a price is falling after purchase I reassess, not often selling unless I really come to my senses (!) but certainly not adding until either the price is solidly holding above my earlier purchase level, or the price has fallen enough to justify a bigger allocation at that price. I think simply adding because a price is cheaper or "because I am dripfeeding" is folly and can lead to painful losses.

In thinking of all the above, don't forget that what you are doing is arranging cashflows. You are directing a cashflow at a particular asset in the hope of receiving a series of cashflows in return in the future. Think carefully about what those future cashflows will be and when you will receive them. e.g. with shares they are uncertain and maybe remote and subject to decrease or termination; with bonds they are steady, at predetermined times and much harder to interrupt than share dividends; with gold there is no contractual cashflow at all, you are relying on a future buyer for your entire return cashflow; etc.

GS

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Re: Drip-feeding - losses now, gains later?

#330479

Postby dealtn » August 3rd, 2020, 8:51 am

tonyreptiles wrote:Thanks all.

I think my main question is querying my understanding that, assuming a bear market happens...

"by drip-feeding an index tracker/investment portfolio during a bear market is an OPPORTUNITY to buy shares at an increasingly discounted price - thereby acruing a larger number of shares which will rise in price when the market turns upward. It an opportunity to buy more shares than would be possible when buying during a bull market, thereby benefitting returns in the long run."

Are there any flaws in that statement?

Cheers
TR


You can't predict when that "bear" market turns and becomes a "bull" one. So the flaw is what happens if the market turns before you are fully invested?

Say you buy 10% every 3 months in the fashion you describe. How do you feel when, in say a years time, and you have invested 40% the market starts rising again? Do you continue or stop and wait for it to fall again? What about 6 months later (when you are 40% or 60% invested) and it is back above when you started?

It is only with hindsight that you can know the path of the market, the optimum strategy, or whether drip feeding was better than one-off lump sum at the beginning.

Accepting what you don't know, and being comfortable with that, are part of being an investor.

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Re: Drip-feeding - losses now, gains later?

#330488

Postby JohnW » August 3rd, 2020, 9:22 am

tonyreptiles wrote:Are there any flaws in that statement?

TR

I'd agree. The flaw is in the assumption, is you want to call it a flaw. No one knows (not thinks they know) which way the market is headed, and when.
The 'theory', to be loose with the word, is that because equity markets (we're talking about that, aren't we?) rise more than fall, overall, long term, then you should get all your 'dripping' in ASAP. I suppose the assumption in that is that we can't foresee next week's market movement; fair enough.
The 'best' strategy is probably unique to you if regret minimisation plays any part, so do as you see fit.
Here's one fellow's take on it:
https://rickferri.com/6-ideas-for-lump-sum-investing/
If you're really keen you can read up on 'dollar value averaging' which is a fancy variation on your dollar cost averaging, or 'dripping'.
And it's nice to be able to smile:
GoSeigen wrote:"there is no such thing as drip-feeding!"

GoSeigen wrote:"in terms of how drip feeding should be used in practice,"
Last edited by dspp on August 3rd, 2020, 9:42 am, edited 1 time in total.

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Re: Drip-feeding - losses now, gains later?

#330617

Postby tjh290633 » August 3rd, 2020, 4:16 pm

GoSeigen wrote:-in terms of how drip feeding should be used in practice,

Surely the essence of drip feeding is that you invest the same amount in the same security, every month without fail, regardless of what the market does.

When the price of the security is lower, then you buy more of them, when it is higher, you buy fewer. The outcome is that your average buying price tends to be lower than if you randomly choose dates on which to invest a lump sum.

This is why savings schemes have been so popular.

TJH

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Re: Drip-feeding - losses now, gains later?

#330646

Postby Bubblesofearth » August 3rd, 2020, 6:25 pm

GoSeigen wrote:This is unhelpful. Please re-read his use of the term in the OP. He is talking about a hindsight assessment. He's perfectly entitled to refer to the period when share prices have been rising as a bull market.

GS


The problem is that once you believe in bull and bear markets then you might easily believe it is possible to know when you are in them and adjust investment accordingly. It's essentially no different from a belief in trends.

If you toss a coin lots of times and plot the result as a +1 move up for heads and -1 move down for tails you will end up with a pattern that looks remarkably like the movements of the stock market. Including 'bull' and 'bear' phases.

Over the long term stock markets have generally risen as a result primarily of economic growth. If you believe this history to be a guide to the future then there is a benefit to investing a lump sum as soon as possible, to capture this long term growth trend. However, if risk reduction is more important to you, then drip-feeding money in over a period of time will be less risky. You sacrifice a bit of expected return for a reduction in risk.

BoE

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Re: Drip-feeding - losses now, gains later?

#330742

Postby sloth » August 4th, 2020, 5:56 am

Here's a good read about lump sum vs. drip feeding:
https://www.vanguardinvestor.co.uk/arti ... -averaging

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Re: Drip-feeding - losses now, gains later?

#330743

Postby Itsallaguess » August 4th, 2020, 6:49 am

We wouldn't advise a non-swimmer to dive into the deep end head-first, and especially when they've already told us that they're actually scared of the water, so for me, any discussion about the 'technical-return' merits (or not) of drip-feeding capital into the markets should come a long way behind simply asking 'What's best for this investor?', and for me, drip-feeding then becomes much more about *investor comfort*, and allowing them to feel their way into what we would hope is going to be a long-term situation that they can then get used to over time, rather than asking them to take that leap of faith into what are often deep and dark waters...

Tootle out slowly into the shallow end. Take it easy, and the pips won't squeek half as much when that cold water starts to get too high....

Cheers,

Itsallaguess

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Re: Drip-feeding - losses now, gains later?

#331435

Postby zico » August 6th, 2020, 6:57 pm

tonyreptiles wrote:Thanks all.

I think my main question is querying my understanding that, assuming a bear market happens...

"by drip-feeding an index tracker/investment portfolio during a bear market is an OPPORTUNITY to buy shares at an increasingly discounted price - thereby acruing a larger number of shares which will rise in price when the market turns upward. It an opportunity to buy more shares than would be possible when buying during a bull market, thereby benefitting returns in the long run."

Are there any flaws in that statement?

Cheers
TR


The key point is that even very experienced investors generally accept it's difficult to predict whether or not the market will go up or down in the near future, so regular investments mean that you automatically buy more units when the market is lower, and fewer when the market is higher.

The word "automatically" is key here, because it's very natural human behaviour to be happy and confident when things are going well, and sad and risk-averse when things are going badly. The "things" in this case are general stock market indices, and when stock market indices are low, there are many thousands of articles published explaining exactly why it would be stupid and reckless to buy now. Conversely, when markets are high, there are lots of people to explain why stock markets are turning into a one-way bet where it's impossible to avoid making money.


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