What a week it has been! Tariff wars sparked panic in the markets, causing massive drawdowns to the all-time-high prices of January 2022 and wiping out all of 2024’s gains.
Good thing we did not lump-sum invest at the end of last year, phew! I was under pressure to hit our equity allocation targets but we felt that with the market’s extra-high P/E ratios and AI-exuberance, it was too risky to lump sum in and suffer a drawdown. We planned to dollar-cost-average (DCA) ~30% of our monthly income as per the investment plan, while keeping aside the rest of the extra cash pre-allocated to equities to deploy during a drawdown.
Well, that opportunity is now here! However, one point we failed to discuss was how we would deploy those funds. How much should we deploy at 10% drawdown? 20%? Do we plan for 30 % and 40% market drops? Do we catch the falling knife or wait till recovery is in the picture? Without a plan, it’s too easy to be overly-excited or overly-pessimistic with the market.
When the first 10% drawdown happened, we deployed 10% of our spare cash plus made our monthly DCA contribution. But within 2 days, index ETF prices plunged a further 10%! We were not ready for that! We put in another 15%, and the UK markets closed before we could decide to add more positions (that’s one down-side of buying Irish-domiciled ETFs).
So now we are left with 75% of our funds. Given that we are also close to the weekly EMA-200 (historically this hardly ever happens), it seems like a really good opportunity to put in a large chunk of this now. What if there’s further carnage? Recovery from large drawdowns isn’t easy. A 35% drop requires 54% gains just to break even. Will we bounce back like the the start of Covid or are we in for a slow recovery like the dot-com crash?
Well, one thing I’m quite sure of: volatile markets are here to stay (for another 4 years perhaps?). As long-term investors, we have to stay calm and take opportunities as they arise. We see drawdowns as good opportunities as we are under-invested in terms of equity (only 10% of our net worth was in the stock market prior to the drawdown).
However, volatility is stressful. Nobody likes to see red in their accounts! In times like this, I feel more confident of my thinking behind our investment plan. By capping equity at 30% of our portfolio, a 35% drawdown equates to 10% loss of net worth. It stings, but it won’t change our lives significantly. I’ll continue to collect bond coupons and rental on our real estate investments in the mean time.
What about you guys? Are you going all-in now? Or are you waiting for safer times? Share with us in the comments!
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