April 28, 2020

Before you start investing, you should understand what you are getting into. A lot of people think that investing is a walk in the park. It’s not.

A lot of people expect monthly consistent return like clock-work only to find out how volatile the market is. That’s why I made this video… to help you understand what you are getting into.

In this video, I talk about how I came across this article by Richard Shaw on Seeking Alpha. He did an analysis over 60 years of monthly percentage changes of S&P 500. Guess what he found?

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90% correct transcript:

So now you have a $100K in your account and you're ready to invest. What should you expect before you start

Welcome back to my channel and in this video we're going to talk about what you should expect before you invest your $100,000 now this is, a large sum of money that you're playing with and it's your hard earned money, so you want to invest very carefully. Now, before you start investing, I want to set your expectation on what's coming ahead. If you're watching this video, you're probably interested in investing in the stock market. Some people can take the stock market very well. Some people cannot take the stock market at all, and that is really the central message of this video is that investing is not a straight line. Now, what do I mean by that? Imagine you're going to put your money into a stock today. What do you think it's going to happen now? Of course, 90% of you or more, it's going to say, well, it's going to go up because if it's not going to go up, why would I bought it?

Buy it. And that's exactly one of the biggest flaw when it comes to investing is that well investing is not necessarily a straight line. So when you invest, let's say at this point of time, it doesn't just go up immediately. It fluctuates. there, there is a range that the market goes up and down the, that's approximately 50% of the market daily is an increase and 50% is in decreased. And if you understand that, then you'll realize that there's a certain randomness when investing in the market. Now what's interesting is I was kind of doing some research, not a lot, not too long ago. And I came across this guy called Richard Shaw and I found him on seeking alpha.com and he's talking about 60 years of monthly daily percentage price changes. And I thought, wow, that's actually quite interesting because I wanted to see how much, S and P 500 change within a month.

So then I pull up the article and I read it ad I'll save you the time. And basically the key messages here, if you take 80% of the months in the last 60 years, so that's majority of the months and in the middle they extreme monthly changes is around 4% to 5% and it can go either way. Negative 4.4% to positive 5.3% now what does that mean? Now it means that if you invest today, you have an 80% chance that the markets would go up by 5% or Dow by 4% by the end of the month. Now that's actually a very important understanding and it should kind of click in your mind because well there is actually quite a high likelihood that the next month you invest in a stock is not going to go up immediately. So you as a longterm investor needs to have that understanding. You as the longterm investor who's just starting out needs to understand, well the stock is not going to go up immediately so then you're not going to panic sell.

And that's one of the mistakes that people make when it comes to the stock market is because they always panic sell at the bottom. Like that's the worst point in time. They can panic sell and it's at the bottom and afterwards to stock doesn't go down anymore and then they think they're cursed or unlucky. And you have watched one of the videos where I explain how I got my unlucky curse when it comes to investing when I first started out. Now if you read the article a little bit further, then you realize that if you take 90% of the months in the middle, then the extreme is negative 6% to positive 7% so if you invest in the stock for a month, you can expect somewhere between a minus six to plus 7% and this is across 60 years of S&P 500 data. And the S&P 500 generally goes up by around 7% a year.

So you can think about it. Wow. S and P 500 generally goes up by 7% a year and within one month, 90% of the month can go up by 7% or down by 6% a month. That really shapes your strategy. It means that the market is volatile. And I'll cover this in another video I probably did in some of the videos before, but I talk about dividend investing and why I'm not that into it. Because when you think about the volatility of the stock market itself, one month is already negative six two positive, 7% so getting a dividend of two to 3% or 4% it's not really dad interesting to me because one month can already wipe out my dividend if I invest in a dividend stock. Now let's look at the extreme. Let's take this concept to the extreme. For the last 60 years based on Richard Shaw's research, the max month gain for S&P 500 is 16% and max loss for S and P 500 within the month is 21% so again, that gives you a good idea of, wow, you can actually invest in the market with $100,000 today and let's you're fully invested in S and P 500 because you somehow bought a ETF land because that's what your financial advisor told you to do.

You can lose 21% within one month, let just let that sink in. You can invest in S and P 500 index and within one month you lose 21% now this is actually not that Farfetch because as of the time I'm recording this video, April 23rd we're actually at the worst point of the coronavirus crash. An S and P 500 went down quite a bit in February and March in 2020 20 now, let's look at the upside. The max gain for S and P 500 within a month is 16% now you're going to notice a couple of things here. Well, the max loss for one month in S and P 500 is 21% it's actually greater than a max gain of 16% now, there can be quite a few hypothesis so on and so forth and a lot of people will kind of rationalize, why that is the case?

But basically my guess is that people panic and they sell faster, so then the drop is bigger than the gain because people need to rebuild their confidence, feel comfortable, then start buying into the market again. So that's why fit in the same period, you're going to see the stock market dropping faster, which is 21% then going up 16% and that's the max ad. When you're looking at the coronavirus market crash and you understand that's what's happening. If you are somehow very unlucky and you end up investing at the very, very, very top and there can be potential one to three months of dropping, which means you can lose 2040 60% and that's why it's so important to not invest at the top and you want always want to wait for a discount even though when other people tell you that a discount is not possible when it comes to investing in the market, and I do have a course to actually covers that, so it helps you find stocks that are consistently on a discount.

So now let's take a step back and sunrise. This video for the last 60 years, we know that the market is quite follow tile, how follow tile within one month, 90% of the time it can go up by 7% or minus 6% somewhere within this range. And the maximum is that's within one month. It can go up by 16% which is fantastic, but then it can also go down by 21% in that case it would be a market crash. So when you're investing in the markets, especially using stocks, maybe using options, if you are very familiar with it, like I do, you need to understand that investing is not a straight line because if you're looking for a straight line, you can always get, a guaranteed investment deposit or whatever certificate. Or you can go try to do a private mortgage or you can just get a bond, buy a bond for four, five, 6%, then your return will be a straight line.

It will be predictable, it will be consistent, but then you're missing out on all the potential equity gain. So that is really the difference between stocks and everything else. And that's really what you are getting into. So I just want to give you that, mental preparation, knowing what's going to happen. So then when there is volatility, you're not like scared. You're not like panic and you're not the person that will panic, sell at the bottom of the market. And I've seen that before actually quite many times with people who don't know how to invest in the market. So want to make sure that you are avoiding that mistake. So thank you for watching and I hope you enjoyed the video. Please help support me by like subscribe and you can watch the next recommended video here as well. So I'll see you in the next one.

About the author 

Eric Seto

Investor, CPA (Canada) based in Hong Kong and Vancouver

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