If you’ve got even the slightest interest in the world at large, you can’t have missed the news about the stock market during the last few weeks and months.
It was up. Quite a lot, actually. Then it fell. Then it recovered.
At the moment I’m writing this, some of the world’s markets happen to be rising sharply for the day, while others are dropping. If there’s a pattern, I’m not seeing it. That’s the nature of volatility: it’s hard to see the forest whilst you’re standing amongst the trees.
Trying to choose the perfect moment to invest, and then cashing out just before share prices start to fall, is called market timing. Every investor dreams of choosing exactly the right days to buy and sell, but the simple truth is that it’s virtually impossible to do so with any consistency. No one knows what the markets are going to do tomorrow, next week or next year.
But that shouldn’t deter you from starting – or continuing – a long-term investment programme for retirement or other financial goals. I’ll explain why.
One of the key variables in any personal investment plan is the investor’s time frame or time horizon. In other words: ‘How long before you need the money?’
If your answer is 10 years, 20 years, or even longer, well, time is on your side. If history is any guide – and I think it is, albeit an imperfect one – the markets will rise, fall and rise again several times whilst you’re waiting. Corrections will come and go. You’ll experience bear markets and bull markets alike. And you should have time to ride out the inevitable periods of decline. Ultimately, we believe, the chances are your portfolio will end up well ahead of where you started.
(Here’s where I need to point out that all investing is subject to risk, and you may indeed get back less than you invested. Again, experience is a helpful but imperfect guide to the future.)
So if you’ve been waiting for the ‘perfect’ moment to make a start on your investing programme, consider this: As with many aspects of life, there’s no perfect moment – at least, not one that anybody can spot in advance. If you keep waiting for the right time, you may never begin.
Is there a way to protect yourself against loss? Not entirely, but you can reduce your potential exposure to market risks by selecting some conservative investments.
As a rule (again looking to history), equities are the riskiest and most volatile parts of the investing spectrum, with bonds and cash at the more conservative end. A bond-heavy portfolio is unlikely to grow much over the long term, but it’s also less likely to suffer major declines. If you are particularly averse to risk, a significant allocation to bonds may be right for you. Cash, arguably the most conservative asset, is unlikely to do anything but deteriorate in value as a result of inflation.
Equity risk doesn’t mean you should avoid stocks entirely – see my point about the equity markets’ positive long-term prospects above – but you do need to take your personal comfort level into consideration. If a sudden, sharp decline in share prices sends you into a panic, having a good bit of your portfolio in high-quality bonds ought to help you sleep better. A key to successful investing is selecting the right risk profile for you and sticking to it.
Another approach is to drip money into the market over a period of time. If you have a lump-sum to invest, spread the risk. For example, rather than investing $20,000 in one go, you might look to invest $5,000 per quarter. You may end up making more or less money this way, but at least you have reduced the risk of a sudden fall in value just after you’ve invested your hard-earned cash. Peace of mind is important if you are to be successful.
Don’t be daunted by market volatility. Regular saving and investing is a great habit, even during difficult times. Establishing a disciplined plan can also help to control the risk of spending too much spare cash on things you really don’t need.
The perfect moment to invest may not exist, but down the road, I believe, you’ll be glad you got started.
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Senior investment planner, Vanguard UK
Reproduced with permission of Vanguard Investments Australia Ltd
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