Skip to main content

What is the average cost method?



Due to the recent plunge in the global market, I noticed that some people came out to promote an investment method called the fool-style stock disaster investment method. The thinking behind it is similar to other lazy investment methods, or monthly stocks/funds, just to change the saying, I will dismantle the problems behind you one by one.

Let you see the risks you need to bear, first look at the logic behind this method. Its approach is this when the market drops 10%, you invest 20% of the funds to buy stock market ETFs when the market drops 20%, you invest another 20% when the market drops 30%, you invest another 20%, And so on. Until the market drops by 50%, you will put all the funds into the market, and when your average cost is equal to the market drops by 30%, you will buy all the funds in the market ETF (that is, All in).

It is a kind of average cost method. The principle of this method is that, first, he believes that the maximum decline in the market is about 50%. After that, it will no longer fall, so it is safe to buy market ETFs at this time. Secondly, as long as you buy every 10% decline, you can successfully bargain.

 Third, the cost is averaged to reduce the cost of some expensive betting codes. It sounds like a strategy, but please wait, think carefully, the following fallacies I and you disassemble, the danger of the stock market is that you sometimes use the wrong method, because of luck, the market can make You make money, this is miserable.

If someone tried to make money in this way. He will later feel that using this averaging down strategy is the correct behavior, and never knows what he is wrong.

What kind of thinking a person has will prompt him to do what kind of behavior, and those behaviors will be doomed, whether you are a long-term winner or a long-term loser in the stock market? what is the problem? The biggest problem is that one time you will buy a stock/index ETF with the same thinking. After falling 50%, you will fall another 50%, and then you can still fall another 50%. 

This is an error that continuously magnifies Dangerous behavior is completely a bet, betting that one time is correct. Many people have lost their entire net worth because of this behavior. Perhaps many people's awareness of the stock market disaster has only stayed in the last decade or eight years, or the bull market in the US stock market in the last 10 years. Those who advocate these methods will make history. The data demonstrates how safe these methods are.

Then I will take some historical data and show you the real examples of the past. This is the Japanese stock market in the 1990s. You can see that in the early 1990s, it was about 40,000 points. In 2003, its lowest position fell to 7,600 points. During the 13 years, it fell by more than -80%. 

Today, 17 years later, the Nikkei index is still only about 20,000 points. This example allows you to see that even in a mature market, the index can be halved from 40,000 points to 20,000 points, and then halved to 10,000 points, after which it can continue to fall by 25%. The fool-style stock disaster investment method.

After an average drop of 30%, all the funds are put into the market, that is, at about 28,000 points, all your assets can be evaporated by more than -70%, and after 30 years, you are still losing money. Let’s look at another example. This is a Malaysian index ETF. Let’s look at the stock market crash in 1997. It can fall from $64 to $8. In short, from $64 to 50% to $32. It fell 50% to $16 and then fell 50% to $8. To 23 years later, this ETF is only about $26 on the blue line.

According to the average cost and flattening strategy just now, your average cost is about $44. From $44 to $8, your loss is -83.6%. Another lesson from this example is not to think that the market index has fallen There is a limit. Don't ignore the exchange rate risk. In the case of the Malaysian market, in addition to the decline in the index, the exchange rate also fell at the same time, resulting in a "double kill of stocks and exchanges."

I don’t know which country’s currency you use. When you buy ETFs in other markets, you will also bear the risk of the exchange rate. Taking this example as an example, when the Asian financial turmoil, many Southeast Asian countries’ currencies depreciated significantly. The stock market also fell sharply. If you take a dip in emerging markets at this time, almost all will be lost, you might say that it was because of Soros that year, and it may not be the next time.

Let me show you one more example. This is the Brazilian market where many newcomers have been encouraged or promoted to buy in the past ten years. Let’s not talk about Brazilian funds, let’s look at Brazil’s ETF first. From 2000 to 2002, it fell from $20 to less than $6, a drop of more than 70%. It can also be slashed, and then slashed again, a total of -73%. During the period, the Brazilian real also depreciated significantly.

Let’s take a closer look. From 2011 to 2016, this Brazilian ETF fell from about $80 to less than $20. It can also be cut down, and then cut down again. Today, this ETF is only $30. You may not understand, Brazil’s index has reached a record high in recent years. The reason why this ETF is still at a low level is simply that Brazil’s currency has depreciated significantly over the past 10 years unless you are a Brazilian native and use Brazilian currency, or You are investing in Brazilian currency.

Of course, this risk is much higher, because Brazil’s interest rate is very high. Before 2017, its interest rate was more than 14%. Maybe you will feel that it is safer to buy these markets. It may be safer to buy in the US market, but if you are like this If you want to, I will tell you in an old-fashioned tone. Juvenile, you are too young. Looking at the US Nasdaq in 2000, you will see that even the seemingly safe US market can also be cut, and then cut again, with a drop of more than -78%. Of course, the probability of repeating the burst of Kwang stocks is not high.

I also like to invest in the US stock market myself, but I want to tell you that there is no such thing as "it will never happen" in this world. Even if it seems like the Great Depression in 1929, there is a chance to repeat it in the next few decades. This is no one can guarantee that it will not happen. Other so-called monthly stocks, monthly funds, and lazy investment laws will also make you fall into the above. Among the risks.

You can think about why some people put forward these proposals, and who is the biggest beneficiary? Banks, brokerages, and fund companies let’s visit friends and relatives around you without looking at the people in the media who promote this method.

Statistics, how many people make money in the long run? How many people lose money for a long time? What is their annual return for making money?

If they lose money, how much did they lose? I can tell you that I have done real statistics myself and interviewed more than 100 people. In the past 5 to 10 years, most of the people in this class have book losses and a few have profitable people. On average, the annual return is only 4 to 8%. If you are a Hong Kong person, you may wish to look at your provident fund. Are you satisfied with the average annual return in the past? Or ask the people around them, their provident fund account. What about performance?

What I want to bring out is that investing is a lifetime thing or at least something you will do in the next few decades, as long as it is only a successful move in your investment career. It is enough to evaporate the wealth you have accumulated over the years. If you have no sense of risk, let your investment fall by -50%. In the next few decades, your finances will always have a chance to get into big trouble. Use simple math to calculate:

If your investment falls by -50%, you have to use a 100% return to recover.

If it falls by -70%, you have to use a 333% return to recover.

If it drops -80%, you have to use a 500% return to get it back.

If it falls by -90%, you have to use a 1000% return to recover, which is 10 times.

In the whole process, you not only lose a lot of money but also spend a lot of time recovering your vitality. The emotional stress and trauma in the process can not be calculated. Those advocates do not need to bear any responsibility for your losses, but you have to take 100% responsibility for your investment decisions, so my advice to everyone is.

First, don’t be lazy or fool in investing. There is almost no chance in the world that you can develop without using your brain.

Second, be aware of what is useful and what is spam, because the information you receive affects your thinking, then your behavior, and finally your results.

Third, you must learn to master the best time to enter and exit.

Comments

Popular posts from this blog

FNKO VS PLBY: Which NFT stock is more attractive for investment?

The market for NFT stocks is recently booming, and investors have begun to show strong interest in NFT stocks.  NFT is a digital asset created using blockchain encryption technology, such as works of art, music or video, etc. Each NFT has a unique digital signature to determine its unique attributes, making it difficult for NFTs to exchange with each other.  NFT provides a unique way for content creators to earn income by paying copyright fees or selling their artworks directly to consumers.  According to data provided by Forbes Advisor, since November 2017, nearly $174 million has been used for NFT transactions. On May 12, Eastern Time, eBay (EBAY.US) added NFT to its online shopping mall product list.  Funko (FNKO.US) and PLBY Group (PLBY.US) recently had the most popular NFT concept stocks, which stock is more attractive for investment?  Let's look at what Wall Street analysts think of these two stocks.  Funko is a pop culture consumer goods company who...

TSM Stock Forecast and Price Target 2021

Today, I will analyze TSMC stocks in-depth with you. In the semiconductor sector, TSMC has always been my most promising stock. TSMC has just announced its results for the fourth quarter of 2020. At the same time, there are new developments in the entire chip industry recently. Therefore, today I will combine the financial report and chips. The latest developments in the industry to analyze the trend of TSMC stocks, First of all, we analyze TSMC’s fourth-quarter and full-year 2020 financial reports to see what are the key points worthy of investors’ attention. First, TSMC’s fourth-quarter revenue and profitability are very good.  Compared with the outlook for Q4 in Q3, the outlook at that time was US$12.4-12.7 billion, and the actual revenue was US$12.68 billion. Actual revenue As the upper limit of the outlook, the gross profit margin outlook is 51.5%-53.5%, while the actual gross profit margin is 54%, which is better than the outlook. The operating net profit margin is expected t...

Bitcoin vs Ethereum vs Dogecoin: Which one is suitable to buy?

 Bitcoin(BTC), Ethereum(ETH), and Dogecoin(DOGE) are the three most-watched cryptocurrencies.  As a young investor, he has a strong mentality of pursuing returns and accepting new things. In recent years, cryptocurrencies have become the new favorites of many people. In particular, these three digital currencies have attracted the most attention: Bitcoin, Ethereum, and Dogecoin.  However, not all cryptocurrencies are created equally and trying to determine which type is right for you can cause confusion.  Each currency has advantages and disadvantages, and which currency you choose to invest in will depend on your situation.  Investing in cryptocurrency must bear the risk  First of all, you must consider whether cryptocurrencies are suitable for you because all cryptocurrencies are highly speculative and subject to great volatility. They have experienced the "currency disaster" in recent weeks, with an adjustable-rate of more than 30%.    Fur...

XPEV stock forecast 2025: can selling software make money?

The new energy vehicle industry has a relatively high degree of attention, that is, Xiaopeng(XPEV) released its first-quarter 2021 financial report.  The general performance data of XPEV are as follows:  The total delivery volume reached 13,340 units, a year-on-year increase of 487.4%.  Total revenue was USD 450 million, a year-on-year increase of 616.1%.  Auto sales revenue was US$429 million, an increase of 655.2% year-on-year.  The gross profit margin was 11.2%, compared with -4.8% and 7.4% in the same period last year and the fourth quarter of 2020, respectively.  The gross profit margin of automobile sales was 10.1%, compared with -5.3% and 6.8% in the same period last year and the fourth quarter of 2020.  To be honest, this data itself is not eye-catching in comparison with Weilai and ideals. Although for officials, this quarter’s financial report has ushered in two major milestones.  One is that gross profit margin continues to improve and ...

4 economic indicators that must be observed!

  Stocks are one of the simplest and most passive types of income, but when we invest in the stock market, we always feel that the current stock price is on the high side, but if we don’t enter the market to buy stocks, we are afraid that the stock price will continue to rise. When the U.S. stock market continues to hit new highs, should it enter the market or should it wait and see and wait for the crash to enter the market.  First of all, I want to declare that I am a value investor and insist on the BUY AND HOLD operation method. We all know that stocks are cyclical, and we are now experiencing the longest bull market in history. Stock market analysts believe that a crash may come at any time, but we just have no way to predict the specific time. I believe everyone understands. But I know that a bear market will definitely come. The long-term trend of stocks often has several economic data as a reference. Today we will take a look at these economic data. source: tradingview...

What is a spac stock in the Investment market?

Let me talk about SPAC first.  SPAC (Special Purpose Acquisition Company) means "Special Purpose Acquisition Company", also known as "Blank Check" or "Shell Company".  As the name suggests, this company has no actual business, and its essence is a financial innovation tool that provides companies with listing services.  More simply, SPAC is a shell resource company established by professional institutions such as investment banks and fund companies as promoters.  The sole purpose of this company's listing is to find the target company, through reverse mergers and acquisitions, to achieve the target company's listing and financing.  Most people pay attention to SPAC from 2020, but in fact, SPAC is nothing new.  The SPAC structure was first born in the 1990s and was pioneered by David Nabers, who worked for the Wall Street investment bank GKN.  However, in the past few decades, compared with traditional IPOs, the number of SPACs is very limited, and ...

Barrick Gold stock price soars after Warren Buffett's buys a stake?

Has Buffett bought gold ? Buffett has not changed. Buffett does not want to hold physical gold, but he has never said that he will not buy shares in gold mining companies. Looking at the entire market, there are not many stocks that fit Buffett's trading. And Barrick Gold Company is just one of them. Buffett bought nearly 21 million shares, and the current share value is $563 million. We now look at the underlying logic of Buffett's purchase of Barrick Gold stock. Compared with physical gold ETFs, gold mining companies can respond positively to market conditions. There are financial reports to analyze, With dividends and stock repurchase plans, gold mining companies have the right to reward shareholders through capital return plans. In contrast, the physical gold ETF has no gains. The market generally believes that it is still in the upward cycle of gold prices . The current international environment is one where black swans emerge one after another. While paying att...

TSMC VS Nvidia, AMD, Intel. How to choose semiconductor stocks?

The general pattern of the semiconductor industry, the overall trend and target price of TSMC in 2021, how the Nvidia(NVDA), AMD, and Intel(INTC) semiconductor stocks are laid out, what is the decisive factors, and whether there is a predictable time point, we conducted a more systematic discussion.  The big picture of the semiconductor industry The semiconductor industry is cyclical. Since the second half of 2019, global semiconductors have entered a new round of the business cycle. This is very important. Only when you understand this reason can you hold stocks with peace of mind. The following analysis is based on the time dimension. In the short term, looking at one to three months now, with the outbreak of the epidemic again, the production capacity of 8-inch wafers are in short supply, the semiconductor industry chain is out of stock, wafer foundry, packaging, and testing links have seen price increases, and production capacity is in short supply. High economic situation, In ...

Capital Flows Tracking Weekly

Release:  January 27, 2021 The weekly Capital Flows estimate the industry's total, based on the report covering more than 98% of mutual fund and ETF assets. Collect actual mutual fund net new cash flows and ETF net issuance together monthly; therefore, there is a discrepancy between these weekly estimates and monthly flows. The data from the previous few weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of fund reports.  Mutual fund data represents the estimated value of net new cash flows, that is, new sales minus redemptions plus net exchanges, while exchange-traded fund (ETF) data represents net issuance, that is, net issuance minus total Redemption amount. This series does not include data on mutual funds that primarily invest in other mutual funds and ETFs that primarily invest in other ETFs.

AMZN stock forecast 2025: Amazon's main advantages

  On July 6, after the US stock market opened, Amazon broke through $3,600, a record high.  Amazon has been oscillating between 3000-3500 US dollars in the past year, and the stock price finally broke through.  Amazon is a stock that has a high valuation from PE but is seriously undervalued by the market from the perspective of its development prospects. It is one of my favorite technology stocks.  Amazon's main advantages are:  1. Amazon's current GMV is only half that of Alibaba.  Looking at the current penetration rate of e-commerce in China and the future penetration rate of e-commerce in the United States, we will find that Amazon e-commerce has huge growth potential in the United States.  Amazon e-commerce is far from saturated in the United States.  2. Cloud computing has unlimited potential.  As the industry leader, Amazon's cloud computing can maintain a growth rate of 20%-30% for many years in the future.  3. The international ...