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Investing & portfolio
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For long-term goals, usually yes. Prices are lower, so each unit costs less, and markets have historically recovered from every past recession. The risk is not the fall itself but buying all at once too early, or panic-selling at the bottom.
A plan solves both: decide in advance how much to buy at each level of fall, and stick to it.
A correction is a fall of about 10% or more from a recent high; a bear market is usually a fall of 20% or more. A recession is a broad slowdown in the economy, and stock prices often fall before it is declared and recover before it ends.
Your average price is the total money invested divided by the total units bought (a weighted average, so bigger purchases count more). Break-even is the price at which your holding is worth exactly what you invested, which equals your average price. Dollar-cost averaging (DCA) invests a fixed amount on a schedule; a buying ladder invests set chunks at set price levels.
A normal correction is usually 10 to 20%. A recession often takes stocks down 30 to 50% from the peak, and a deep crash can pass 50%. The Drawdown & Buying Planner uses steps of 10% for a recession (down 10, 20, 30, 40 and 50%) and wider steps for a crash.
Nobody knows where the bottom is. That is why you buy in steps instead of guessing one price.
For each step the planner sets price = starting price x (1 - fall%), amount = total x chunk%, and units = amount / price. After each step it adds up the money and units bought so far, and your running average price is money invested divided by units held. Break-even is that average; the move needed from the current price is average / current price - 1.
The recession scenario uses steps of 0, 10, 20, 30, 40 and 50% below the start. Correction uses 0 to 20%, and crash uses 0, 20, 35, 50 and 65%. When prices are rising, the same idea works in reverse: you buy on the way up at +5, +10, +20 and +30%.
Chunk size depends on your risk style. Each step gets a weight of (step number) raised to a power, and the weights are scaled to add up to 100%. Cautious investors use a power of 1.5, so deeper steps get far more; balanced uses 0.5; aggressive uses -0.5, so earlier steps get more.
On the six recession steps that gives roughly: cautious 2, 7, 12, 19, 26 and 34%; balanced 9, 13, 16, 19, 21 and 23%; aggressive 28, 19, 16, 14, 12 and 11%. You can change any chunk, and they always add up to 100%.
A buying ladder splits your money into chunks, one per price level. Say you have 12,000 to invest in a fund priced at 100 and use four equal chunks of 3,000 at 100, 85, 70 and 55 (falls of 0, 15, 30 and 45%). You end up with about 162.7 units at an average price of 73.76, which is 26.2% below the starting price.
Buying everything at 100 gives 120 units. If the price later returns to 100, the ladder is worth about 16,270 (a 35.6% gain) against 12,000 (no gain) for the lump sum.
Cautious investors hold more back for the deepest falls; bold investors deploy earlier. If you weight the same four steps 10%, 20%, 30% and 40% instead of equal chunks, you get about 178.9 units at an average of 67.06, which is 32.9% below the start, and a 49.1% gain if the price returns to 100.
The catch is that if the price never falls that far, most of your money is still waiting on the sidelines. Match the weighting to how much sitting out you can tolerate.
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If you bought everything at 100 and the price falls to 55, you need an 81.8% rise to get back. With the weighted ladder above your average is 67.06, so you break even at 67.06, only a 22% rise from the 55 low.
This lower break-even is the main benefit of a ladder. It does not guarantee a profit: if the business or fund keeps falling, buying more only adds to the loss.
Dollar-cost averaging invests the same amount every week or month whatever the price, so it needs no view on the market and suits regular income. A ladder is triggered by price: you wait for falls and buy more at lower levels, so part of your cash may sit idle for a long time.
If prices never fall, a ladder can leave you uninvested while the market rises, which is its main cost (opportunity cost). Many people combine them: invest regularly, and keep a separate reserve for a ladder.
It works best on diversified funds you would still want to own at a lower price. It is risky on a single company whose business is getting worse, because the price may never recover. Also avoid borrowing to buy, and keep a safety fund of 6 to 12 months of expenses so you are never forced to sell.
These are the topics worth searching for to study the ideas behind the planner.
Open the Drawdown & Buying Planner, choose the Recession scenario and your risk style, then adjust each step. Before that, check how much a recession could cost you in the Asset Allocation Calculator and read the guide to recession-proof asset allocation. For the basics, see averaging down.
This is educational content, not investment advice. Figures are illustrations, not forecasts or recommendations.
It can be for long-term goals, because prices are lower. Buying in planned steps reduces the risk of investing everything before the bottom.
You cannot, which is why a ladder of preset buying levels works better than guessing one price.
Keep a safety fund of 6 to 12 months of expenses outside your investments, and decide in advance how much extra cash to hold for buying after falls.
A lump sum buys everything at one price. A ladder buys in chunks at lower prices as the market falls, which lowers your average cost and break-even.
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