Investing at all-time highs, plus Lump Sum vs. DCA annnnnd Bitcoin's rough start
The Sandbox Daily (1.23.2024)
Welcome, Sandbox friends.
Today’s Daily discusses:
investing at all-time highs
Lump Sum or dollar-cost average (DCA)
bitcoin ETF’s rough start out of the gates
Let’s dig in.
Markets in review
EQUITIES: Nasdaq 100 +0.43% | S&P 500 +0.29% | Dow -0.25% | Russell 2000 -0.36%
FIXED INCOME: Barclays Agg Bond -0.24% | High Yield -0.12% | 2yr UST 4.378% | 10yr UST 4.141%
COMMODITIES: Brent Crude -0.40% to $79.74/barrel. Gold +0.37% to $2,049.1/oz.
BITCOIN: -2.68% to $39,087
US DOLLAR INDEX: +0.23% to 103.571
CBOE EQUITY PUT/CALL RATIO: 0.49
VIX: -4.85% to 12.55
Quote of the day
“Your mind is like a parachute: if it isn't open, it doesn't work. ”
- Buzz Aldrin, Astronaut
Investing at all-time highs
With the S&P 500 index finally printing new all-time highs after a two-year bear market, many investors express a certain anxiety or discomfort holding their positions while the index resides at fresh new highs.
What many fail to realize though – until they look at a long-term chart – is that the stock market is often trading at or near all-time highs with some regularity.
Below is a breakdown showing the percentage of time that the S&P 500 has traded within various ranges of an all-time high since 1952.
As you can see, the S&P 500 trades within 5% of all-time highs 44% of the time. Withing 10% of ATHs? 59.6% of the time.
In fact, even after a strong run in 2023, the market could continue to stretch its legs in 2024 – using history as a guide.
Over the last 50+ years, had you invested in the S&P 500 at an all-time high, your investment would have been higher a year later 73% of the time with a median return of 12.1%. This is in line with historical market averages – whether we are at all-time highs or not.
New highs are not scary.
In fact, quite the contrary. Forward returns on average are in your favor.
Source: Bespoke Investment Group, J.P Morgan, A Wealth of Common Sense
Jumping into the market vs. slowly wading in
One of the classic questions that confront investors at some point along their financial journey is deciding when to invest a sum of money.
More specifically, when provided a larger-than-routine deposit into your investment account, should you invest that money up front all-at-once or gradually deploy dry powder according to a schedule? Lump Sum or DCA?
Given investors’ often visceral aversion to losses, it’s easy to become paralyzed by decisions over exactly how and when to invest. That may be especially true in today’s uncertain market environment. Keep in mind, we are humans – not robots – and we are all subject to behavioral and cognitive biases.
This chart from Nick Maggiulli illustrates the benefit of investing a sum of money all-at-once (Lump Sum), rather than incrementally via a dollar-cost averaging (DCA) strategy.
As you can see, over the 25-year period covered by this analysis, an investor would have been better off most of the time by investing a Lump Sum all-at-once. According to these numbers, the DCA is a losing strategy.
Vanguard ran the math, as well, arriving at a similar answer – with Lump Sum investing outperforming DCA purchases 68% of the time.
Back to Nick Maggiulli for a minute, who expanded this exercise beyond U.S. equities to other asset classes.
Result? Same thing – Lump Sum – even on a risk-adjusted basis.
The question becomes more nuanced when you consider path-dependency, timing, and the variability of returns (greater with Lump Sum investing).
Bottom line, investors must always balance what the calculator says and how they feel about it. The charts above provide the “calculator answer.” But a calculator doesn’t experience human emotions. And when it comes to the question of whether to invest a Lump Sum all-at-once, a key emotion hangs in the balance: the potential for regret.
Imagine if you had just sold a business or received your annual bonus. If you invested it all at once and saw it drop over the next 3-6 months by 10/15/20%, these charts and data points might be cold comfort. Perhaps investing incrementally via a DCA – even if it is sub-optimal – may be suitable for some but not others.
Source: Nick Maggiulli, Vanguard
Bitcoin’s rough start out of the gates
Bitcoin is down over 20% since the U.S. Securities and Exchange Commission (SEC) approved spot bitcoin exchange-traded funds (ETFs).
A drop in the bucket for seasoned crypto investors, but a rough start out of the gates for newer investors entering the space. (**Warning: excuse the poorly scaled y-axis for the price chart on the top pane - brutal!)
Over the past couple weeks, bitcoin has faced two primary challenges:
Tougher macro conditions, as interest rates have rallied and the U.S. dollar index has strengthened. And…
Significant selling pressure from traders closing their Grayscale Bitcoin Trust (GBTC) arbitrage positions, as well as the FTX bankruptcy estate selling off GBTC, bitcoin, and other-related assets
Spot ETF flows since inception indicate an aggregate net inflow of around $1.2 billion, comprised of approximately $4 billion in inflows offset by a substantial $2.8 billion in outflows from GBTC.
A report from CoinDesk yesterday states that FTX has fully divested its GBTC stake worth nearly $1 billion, as part of the ongoing bankruptcy asset liquidations. Assuming this CoinDesk report is accurate, the major selling pressure from GBTC should be coming to an end.
Source: CoinDesk, FS Insight, Bitcoin Magazine Pro
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.