Finance Smiths

Personal finance apprentices-in-training

Averaging down on stocks and cryptos

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It’s frustrating but Singapore is returning to Phase 2 (Heightened Alert). We managed to squeeze in a few dining-in gatherings over the last week and a half so we did get to catch up with some friends. But it’s a disappointing turn of events to lose that so quickly after just opening up not long ago. I’m not happy about this and we are trying to come to terms with it. Since we can’t go out much for social interaction and gym exercise anyway, we decided to bring forward our 2nd vaccine jab earlier to later this week for my wife & I, and early next week for my helper. Might as well use this time to wait it out at home for the 2 weeks after the 2nd vaccine jab to pass so we can be considered fully vaccinated.

Not surprisingly, the Singapore stock market fell on Mon and will probably continue to do so the rest of this week. The same applies to stock markets globally that are also falling as countries struggle to cope with the Delta variant. I have only been selectively averaging down on some of our Singapore stocks, Chinese tech stocks & ETFs that have dropped more significantly. Though the latter is due to the increased regulatory scrutiny and restrictions by the China government. With my limited cash, I can average down probably up to the point of this market dip becoming a correction. If it becomes a market crash, I will probably run out of cash by then. But only at this point will I start to explore the possibility of opening a margin facility to take on secured loans (by pledging collateral such as stocks) for the purpose of purchasing shares.

As for cryptos, I would say the market correction is becoming a crash and I have been averaging down on my crypto positions. I don’t have enough cash to make big purchases but neither do I have enough conviction to do so. While I still believe in the future of cryptos, this doesn’t translate into me investing large sums of money into it. There still has to be some level of position sizing in accordance with the proportion of each asset class in our investment portfolio. I’m managing it for my family and I can’t afford to take on too much risk for the sake of generating returns. But cryptos are too important to be ignored and I can’t afford to be too risk averse and not generate sufficient returns.

Investing more during the China triggered crypto crash

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China ordered its major FIs to stop facilitating digital currency transactions and it triggered a crash in the crypto markets. My response has been to dollar cost average down my crypto positions in Ethereum, Bitcoin, Binance Coin, Matic and Cardano. I’m still making losses on my crypto portfolio as a whole but I will continue to invest in it if prices keep sliding. Its value is still less than 5% of my total investment portfolio and I view it as a separate asset class. Just like any other asset class, a good time to invest is when its market is crashing.

This is what I did with the equities portion of my investment portfolio last year during the Mar 2020 Covid market crash and it has paid off so far. However, I have to admit I was taking bigger positions with the stocks and ETFs then. Just because equities is a more mature asset class that I’m familiar with and they are not as volatile. Plus I had more time to plan, think and react when navigating the equities market. As I’m still learning about cryptos, it’s difficult for me to take big positions in them given the volatility. Especially when there’s not as much time to plan, think and react when navigating the cryptos market.

Market crashes are an unforgiving test of my nerves and preparedness. Whether I have set aside a sufficient amount of warchest and how well I use it to average down on my current positions or start new positions. Questioning my instincts and the security of my main income source (i.e. salary from my job) in a recession in relation to the spending buffer or emergency funds I have set aside for my family. Looking back at what went right and what went wrong after the market crash in itself can be a painful self-evaluation experience.

At this time, it feels like a learning journey for me in navigating the cryptos market crash. Unlike the equities market recovery that usually correlates with improvements in business and economic conditions (or loose monetary policy and quantitative easing for that matter), I’m still trying to make sense of the factors that can generate a cryptos market recovery. Or should I take a more holistic and long term view on this and build this asset class position up every time there’s a market crash. Just because it helps to diversify my investment portfolio.

What I did and felt during the crypto crash

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It has been an intense 48 hours! If you haven’t heard by now, the crypto market started falling before accelerating into a crash. Crypto prices collapsed before recovering some of their losses. It’s the first time I have gone through such a high level of volatility with my investments. I mean, my US and China tech stocks prices can move quite a bit compared to my SG and overseas stocks & ETFs. But wow, definitely not to this extent!

I allocate about 5% of my investment portfolio to cryptos so I treat the S$35k value as a single position even though I’m almost entirely invested in Bitcoin, Ethereum and Binance Coin. The crypto losses are not as bad when I zoom out and compare it to the rest of my investment portfolio. Anyway, I was also averaging down on them as crypto prices were crashing so the rebound helped to offset some of the losses.

As the crypto prices were collapsing, I was shocked by how quickly the value of my investment position was falling. I hadn’t worked out my strategy in a crypto crash because it was my first time going through one. It was a good thing I didn’t have a big position as I learnt how to navigate my first crypto crash. I tried averaging down but because the crypto prices were falling fast, I had to keep buying in with smaller amounts at a time.

It’s different from stocks and ETFs during a market crash when I average down less frequently but with larger amounts at a time. And because the crypto market is open 24/7, you have no idea what’s going to happen when you go to sleep and wake up in the morning. At least the stock market closes after a certain time in the day and it acts as a circuit breaker. Essentially, you get to stop, breathe, think and come up with a better investment strategy the next day.

Whereas in the crypto market, the madness can just keep going and it becomes very difficult to manage your emotions to come up with a viable investment strategy. In this case, I just averaged down until I ran low on cash funds in my crypto account. That was my circuit breaker and I knew it was time to go to sleep and hope for a rebound to stem my crypto losses. When I woke up in the morning, my crypto portfolio had recovered some of its losses but is still down.

As I write this, crypto prices are starting to fall again so I may have to go through the same experience more than once. While I do have investment cash on standby, it’s running low because I used some of it to invest in US and China tech stocks during the recent dip. And I don’t want to over-allocate cash funds to my crypto portfolio because I’m still a newbie at it. It takes time to rebuild my investment cash and learn how to better manage my crypto portfolio.