How To Face Up To Buying The Dips
Buying stocks as they drop is harder than it sounds. Here’s one strategy that might help keep you on course in turbulent times.
3 min
All investors are the prisoners of their past, and that shapes how they face the future.
Until the past few weeks, stocks had resembled a perpetual moneymaking machine, rising smoothly for nearly all of a decade and a half. From March 2009 through the peak this January, U.S. stocks gained more than 800%. The pandemic panic of February and March 2020 lasted only five weeks.
So it’s understandable if you think the nearly 20% collapse so far this year is just a blip. Stocks will soon resume their smooth upward course, right?
I hope so.
But, for all we know, the coming years might resemble 1966 to 1974 or 1929 to 1943, long slogs when stocks kept jolting up and down but finished essentially where they started.
In that case, you will need new weapons in your psychological arsenal. Years on end of poor stock returns would torment anyone who isn’t prepared for a long grind.
One weapon to consider is called value averaging. It’s like buying the dips—purchasing more stocks as prices drop—on steroids.
At its heart, this technique combines two basic ideas: dollar-cost averaging (putting money to work automatically every month or quarter) and rebalancing (selling some of your winners and buying some of your losers).
In value averaging, you set a target amount by which you want your account to grow each period. Say you want to end each month with $1,000 more than you started with.
In periods when stocks fall, you have to add enough to your holdings to hit the target you’ve set.
If, for instance, the value of your portfolio falls $250, you would need to buy $1,250 in stocks to finish the month with $1,000 more than you had at the beginning. If your portfolio’s value drops $500, then you’d add $1,500, and so on.
In a rising market, you’d buy less than $1,000—and even sell some, if stock prices go through the roof.
Value averaging is the brainchild of Michael Edleson, ex-chief economist at the Nasdaq stock exchange and former chief risk officer for the University of Chicago’s endowment.
Most investors say they intend to buy and hold—but many end up buying high and selling low instead.
Investors who use value averaging “have precommitted to bury their demons,” Mr. Edleson says—“the greed demon that makes you buy high and the fear demon that makes you sell low.”
This technique can’t eliminate the risk of underperformance, however. “If you cherry-pick certain periods, value averaging can look horrible,” says Mr. Edleson. “Your success is always going to depend on the starting point and ending point.”
The strategy does better when volatility is high and worse when stocks move smoothly up or down. In a long, steady market, Mr. Edleson says, “there’s nothing better than buy-and-hold, just sitting on it.”
So value averaging is a kind of bet that markets won’t soon return to the abnormally smooth upward slope of, say, the mid-2010s. If you think they will, it might not be for you.
Harald Deppeler, 53 years old, a semiretired physicist in Zurich, has been using the approach since 2013. He built his own spreadsheets to do so; most financial firms aren’t set up to automate value averaging for customers.
The approach “gives you a sense of having a slight edge, but also it tests you,” Mr. Deppeler says.
As stocks rose smoothly between 2013 and 2018, his holdings in an S&P 500 fund exceeded his targets, so Mr. Deppeler had to sell roughly 8% to 12% of that position, he says. (Capital gains are not taxable in Switzerland; as a rule, U.S. investors should consider value averaging only in tax-deferred retirement accounts.)
Mr. Deppeler says he’s aware that having to sell down his holdings during a long bull market probably cost him a small fortune in forgone gains, although he hasn’t calculated that opportunity cost. “I had a pile of cash, which I just couldn’t make any use of,” he says.
On the flip side, in March 2020, value averaging compelled Mr. Deppeler to put a “six-figure amount” into his S&P 500 stock fund during a horrifying decline. “It forced me to say, ‘The market is still falling, and now I have to buy into that,” he recalls.
“At the time, I had to keep telling myself, ‘This is what the plan is actually designed for, to make you buy more when the market dips. Stick to the plan, stick to the plan,’” says Mr. Deppeler.
“If someone really can take the appropriate amount, put it in stocks and then let it ride, rebalancing from time to time but otherwise holding, I’m not going to tell them value averaging is any better,” says Mr. Edleson. “But in practice not many people can do that.”
Then again, if you don’t have the discipline to buy and hold, you might not have the extra discipline to buy even more in a down market.
Few things are harder than buying more when markets fall. That’s why discipline is an investing superpower. Value averaging could help some people stay the course—but it takes work, and it won’t work all the time. Then again, in markets nothing works all the time.
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Food prices continue to rise at a rapid pace, surprising central banks and pressuring debt-laden governments
4 min
LONDON—Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts—literally.
This is happening even though inflation as a whole is falling thanks to lower energy prices, presenting a new policy challenge for governments that deployed billions in aid last year to keep businesses and households afloat through the worst energy crisis in decades.
New data on Wednesday showed inflation in the U.K. fell sharply in April as energy prices cooled, following a similar pattern around Europe and in the U.S. But food prices were 19.3% higher than a year earlier.
The continued surge in food prices has caught central bankers off guard and pressured governments that are still reeling from the cost of last year’s emergency support to come to the rescue. And it is pressuring household budgets that are also under strain from rising borrowing costs.
In France, households have cut their food purchases by more than 10% since the invasion of Ukraine, while their purchases of energy have fallen by 4.8%.
In Germany, sales of food fell 1.1% in March from the previous month, and were down 10.3% from a year earlier, the largest drop since records began in 1994. According to the Federal Information Centre for Agriculture, meat consumption was lower in 2022 than at any time since records began in 1989, although it said that might partly reflect a continuing shift toward more plant-based diets.
Food retailers’ profit margins have contracted because they can’t pass on the entire price increases from their suppliers to their customers. Markus Mosa, chief executive of the Edeka supermarket chain, told German media that the company had stopped ordering products from several large suppliers because of rocketing prices.
A survey by the U.K.’s statistics agency earlier this month found that almost three-fifths of the poorest 20% of households were cutting back on food purchases.
“This is an access problem,” said Ludovic Subran, chief economist at insurer Allianz, who previously worked at the United Nations World Food Program. “Total food production has not plummeted. This is an entitlement crisis.”
Food accounts for a much larger share of consumer spending than energy, so a smaller rise in prices has a greater impact on budgets. The U.K.’s Resolution Foundation estimates that by the summer, the cumulative rise in food bills since 2020 will have amounted to 28 billion pounds, equivalent to $34.76 billion, outstripping the rise in energy bills, estimated at £25 billion.
“The cost of living crisis isn’t ending, it is just entering a new phase,” Torsten Bell, the research group’s chief executive, wrote in a recent report.
Food isn’t the only driver of inflation. In the U.K., the core rate of inflation—which excludes food and energy—rose to 6.8% in April from 6.2% in March, its highest level since 1992. Core inflation was close to its record high in the eurozone during the same month.
Still, Bank of England Gov. Andrew Bailey told lawmakers Tuesday that food prices now constitute a “fourth shock” to inflation after the bottlenecks that jammed supply chains during the Covid-19 pandemic, the rise in energy prices that accompanied Russia’s invasion of Ukraine, and surprisingly tight labor markets.
Europe’s governments spent heavily on supporting households as energy prices soared. Now they have less room to borrow given the surge in debt since the pandemic struck in 2020.
Some governments—including those of Italy, Spain and Portugal—have cut sales taxes on food products to ease the burden on consumers. Others are leaning on food retailers to keep their prices in check. In March, the French government negotiated an agreement with leading retailers to refrain from price rises if it is possible to do so.
Retailers have also come under scrutiny in Ireland and a number of other European countries. In the U.K., lawmakers have launched an investigation into the entire food supply chain “from farm to fork.”
“Yesterday I had the food producers into Downing Street, and we’ve also been talking to the supermarkets, to the farmers, looking at every element of the supply chain and what we can do to pass on some of the reduction in costs that are coming through to consumers as fast as possible,” U.K. Treasury Chief Jeremy Hunt said during The Wall Street Journal’s CEO Council Summit in London.
The government’s Competition and Markets Authority last week said it would take a closer look at retailers.
“Given ongoing concerns about high prices, we are stepping up our work in the grocery sector to help ensure competition is working well,” said Sarah Cardell, who heads the CMA.
Some economists expect that added scrutiny to yield concrete results, assuming retailers won’t want to tarnish their image and will lean on their suppliers to keep prices down.
“With supermarkets now more heavily under the political spotlight, we think it more likely that price momentum in the food basket slows,” said Sanjay Raja, an economist at Deutsche Bank.
It isn’t entirely clear why food prices have risen so fast for so long. In world commodity markets, which set the prices received by farmers, food prices have been falling since April 2022. But raw commodity costs are just one part of the final price. Consumers are also paying for processing, packaging, transport and distribution, and the size of the gap between the farm and the dining table is unusually wide.
The BOE’s Bailey thinks one reason for the bank having misjudged food prices is that food producers entered into longer-term but relatively expensive contracts with fertilizer, energy and other suppliers around the time of Russia’s invasion of Ukraine in their eagerness to guarantee availability at a time of uncertainty.
But as the pressures being placed on retailers suggest, some policy makers suspect that an increase in profit margins may also have played a role. Speaking to lawmakers, Bailey was wary of placing any blame on food suppliers.
“It’s a story about rebuilding margins that were squeezed in the early part of last year,” he said.
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