What’s a…
…better…
…market entry?
Lumpsum, or piecemeal?
Since I function in a growth market, …
…which can be seen as a microcap vis à vis the world, …
(you guessed it, India, currently exhibiting value, …
…but for our discussion please treat it as a growth market,) …
…and, because this discussion makes the most sense for a growth market exactly, …
…please, therefore, treat this comparison as a tool to help you decide…
…your growth market entry strategy.
You come into a lumpsum, let’s say.
What are your options? For the investible portion that is.
Pump in – one shot?
Average down, bit by bit, as and when opportunities arise?
Two ends of the spectrum. Where do you stand? Let’s break it down.
What’s your capacity for drawdowns?
Can you take a 50% notional drawdown, and not have a sleepless night?
Yes? Sure? Ok, pump it into the long-term growth market in one shot, provided you know your stocks well enough. In ten years time you’ll look like a star. In three months, a fool. One year, bigger fool. Perhaps. Slowly, growth will show, …
…and compound.
In two decades, you’ll rule.
Not able to take the big drawdown? Don’t like looking like a short-term fool?
That’s ok.
Very few people can handle big drawdowns.
Even lesser individuals like looking like fools, even if for a short time.
Then you can go in bit by bit.
Two strategies.
If you know your stocks well, you can average down.
If you want the market to throw you winners, you can average up.
Disadvantages?
Sure. You aren’t subjected to big drawdown pangs, and aren’t chastised by the masses for investing on interim highs. In lieu of that, not all of your money is in, and thus, not all of it is exposed to growth, or for that matter compounding. Also, your money hangs around to be…
…spent.
Don’t like the downsides of either extreme?
There’s a way out for you. You can take the middle path. You can also decide for yourself how ‘middle’ it is.
Decide for yourself a time-period that you want to be in by. 3 months? 6 months, 9 months, 12 months? Longer will take you towards full-on piecemeal.
Decide also, for yourself, about averaging down, up, or down till a level, and from that point onwards, only up. You can say that you are for example going in to a stock with margin of safety, up to a level, but then you would like the stock to prove itself, and from that point onwards, you now start averaging up as the growth story unfolds. You can then couple your averaging down and up combo to your total time-frame selected for going in.
Bottom-line : in X months your funds start getting full growth and compounding effects, as per the cost-averaging mix Y you have chosen.
Both X & Y should be a function of your risk profile.
Isn’t that the reason why you chose the middle path, because you didn’t want to be exposed to lumpsum drawdowns?
So, three choices, break it down, follow what suits.
On a personal front, if money needs to go into a growth market, for me its better sooner than later.
Took a long time to realize this though.
My pursuit for financial independence was impeding this understanding.
The moment financial independence was achieved, along with it came the realization…
…that we don’t wait on a long-term growth market.
magic bull 