With summer now in full swing, the ocean has warmed up sufficiently for me to commence my annual ‘swim season’. I’ve always enjoyed body-surfing – once I’m in, that is. Not being one for cold water, getting in is the problem.
There are many who are advocates of the ‘plunge in and get it over with’ approach. My view is avoid unnecessary ‘pain’ whenever possible, so I’ve developed a process that involves, what I would call, a phased approach. I get used to the water up to knee level, then waist, then a splash around the face and neck, and then all in. It works for me and while in my younger days I had to accept the peer scrutiny that came with it, over time I learned that it worked.
Be comfortable with your way
When entering the investment markets, there’s no perfect way to do it. What’s most important is to be comfortable with your way. Investor behaviour is the greatest contributor to investment performance and regret is one of the key influences of investor error. So being comfortable with the prices paid for investments will go a long way to avoiding bad decisions later.
Investment data exists in various forms for up to 200 years and for the US markets we have very detailed data back to 1926. Over this time, it would have generally been statistically better to have ‘plunged’ into the markets most of the time. It makes sense because market prices have risen over this time so the sooner the investment is made, the greater the return.
Balance statistics with specifics
However, investors have individual investment horizons – statistics only provide guidance around broad principles. Investors invest real dollars over a real lifetime – not statistical averages. So, whether to plunge in or wade in will depend on several factors, including:
- Risk propensity and risk tolerance – how comfortable the investor is with taking risk compared to how much loss can be tolerated before a change is required. Losses are felt twice as great as gains, and ‘pain’ usually causes a change in strategy.
- The price at the time – it is logically easier to invest quicker but emotionally more difficult after major price falls,
- Time horizon – the longer the time horizon the more rapid the plunge. A 25-year-old investing their superannuation wouldn’t be phasing.
Phasing in is all about regret avoidance – i.e. avoiding feeling that the original decision was wrong. It’s as simple as applying whatever method makes sense logically and wouldn’t be regretted no matter the outcome.
There are many methods to making investments. Plunge or phase is overly simplistic. For example, phasing could take various forms including:
- ‘dollar-cost-averaging’ – a very common and regularly recommended method where the investment is made over a fixed time horizon in equal instalments at regular intervals.
- ‘value averaging’ – based on phasing in over a period, but where the primary trigger for determining exactly when the next investment is made is price. If the price falls, more money is invested. If it rises, less.
In both cases, the total investment will be completed within the agreed time frame.
As we continue through this period of increased volatility, for those with money to invest it has become that much more important to be comfortable with the method and timing of investments.
I seldom regret my method of entering the ocean for a swim – there’s no real downside. However, investment returns are definitely impacted by time and timing and just like an ocean swim, you have to be very careful about choosing the most appropriate waves to catch to have the most fun without getting injured. Sometimes it’s necessary to just hold your breath and wait for the froth to pass overhead.