Is It the Right Time to Invest?
📺 Today's topic is a question I often get asked: is now the right time to invest, and should I be worried about a market crash?
Before we start, I invite you to watch or replay our video: how to get started investing, which has the investing principles and what to do before getting started! Remember, investing carries some risk, so think long-term and make sure you also have some cash savings as markets fluctuate! I am also not here to give you financial advice, but my tips and experience investing, so do your own research.
Let’s say you saved a bit of money saved or you are ready to invest, but feel it’s maybe not the right time.
How can you know if now is the right time to invest or should you wait? There are usually two approaches to investing, so today I am going to explain the difference between "time in the market" and "timing the market".
When you spend "time in the market", it means that you invest for the long term and stay invested even when the market fluctuates, i.e. goes up or down. Over the long term, the stock market tends to go up, despite fluctuations and downturns. So, if you're able to stay invested for a longer period of time, you'll likely see your investments grow.
​​Because you don’t take your money out of the stock market, you don’t sell your investments and cash in the money; the returns from your investments generate more returns over time. This is called compounded returns.
On the other hand, when you try to "time the market", you are a more active investor and you are trying to predict when the market will go up or down and buying or selling your investments accordingly.
1/ So, where does this appeal come from?
The stock market is a fast-paced environment so you can easily be dragged into it. Some investors are also worried about missing out on potential gains, maybe when they see the market going up and they want to participate. There can be a lot of noise around the markets, friends giving you recommendations and you may feel like you’re missing out.
On the other hand, you could start to panic and worry about losing money when markets start to go down and you sell your investments.
These are usually unsuccessful and unsustainable behaviours, they are very risky and usually make you stay up at night.
Until you actually experience this, or have what we call ‘skin in the game’, it’s hard to comprehend, but emotions and psychology play such a big role in our investing decisions.
It’s very important to ignore the noise and the news. We are bombarded with headlines all day, but taking a step back and looking at the bigger picture is really important. Don’t get dragged into it and make hasty decisions you will regret later. If you do look at financial and economic news, take the time to analyse them and go back to your investing goals and plan.
To be a successful investor, it's important to focus on a long-term investment strategy and avoid getting caught up in short-term market fluctuations.
One of the best decisions was to remove my investing app from my phone for a while and avoid looking at market fluctuations.
2/ time in the market or timing the market?
So while "timing the market" may seem like a tempting strategy to try to maximise your returns, as I said before it's often a losing game for most individual investors.
Instead, it's generally recommended that you focus on "time in the market" and aim to stay invested for the long term. This means having a diversified portfolio that you hold onto for years, even during periods of market volatility. Doing so makes you more likely to see steady, long-term growth in your investments.
Time is your friend when you invest money and it will help you ride out market volatility. This means that even if there are short-term market fluctuations, you can still benefit from long-term growth.
For example, if you had invested $1,000 in the S&P 500 index in 1993 and left it there for 30 years, it would have grown to around $16,963.50 in 2023 despite several market drawdowns during that period.
You may have heard about well-known investor Warren Buffett. He is a big advocate of time in the market and said that his favourite holding period for investments is… "forever".
Another example isthe founder of Vanguard Group. He also advocated for long-term investment and popularised index funds (a basket of stocks), which track the overall market's performance.
Of course, how you invest will depend on your goals, your appetite for risk and how much time and effort you're ready to invest in your portfolio. But I personally find time in the market to be a proven investment strategy that helps me work towards my long-term financial goals; it’s also a lot easier.
3/ Lump sum or drip feed?
Finally, investing a large sum of money (maybe the money you’ve been saving for a while, an inheritance or a bonus) can be scary, especially if you're worried that the market might drop right after you invest.
This fear of losing money or regret can leave you feeling stuck and unsure of what to do. Is it better to invest all your funds at once or spread your investments over a few months?
There's a strategy called pound-cost averaging that can help you overcome this paralysis and start investing your money now.
With pound-cost averaging, you invest a fixed amount of money at regular intervals regardless of market conditions.
This helps you buy more shares or units in funds when prices are low and fewer shares when prices are high, resulting in a lower average cost per share over time. Let’s look at a quick example:
Say I invest £100 every month, and I buy units in an index of £10 today. I buy 10 units. Now if the market goes up and the price goes up to £20, with my £100, I can buy 5 units. If the market goes down and the price goes to £5, with my £100, I can buy 20 units.
4/ What are the pros and cons of pound cost averaging?
Pound cost averaging involves making regular, smaller contributions to an investment, while lump-sum investing requires a larger, less frequent investment.
If you choose to invest a lump sum, there is a risk that you may not achieve the market average if the timing of your investment coincides with a market peak. This could result in your money being able to purchase fewer stocks or units at a higher price.
With pound cost averaging, the downside is that it may not be the most profitable strategy if the asset's price consistently increases, as the investor may miss out on potential gains.
When you start investing, you usually make an initial lump-sum investment. Remember that it doesn’t need to be big, and then set up regular weekly or monthly contributions.
It's important to remember that investing is a long-term commitment, so you may also consider making additional lump-sum payments over the years in addition to your regular contributions.
5/ What if I invest and the next crash is coming?
History has shown that markets have always eventually rebounded after a crash, even if it took some time.
Major market crashes such as the 2008 financial crisis, the 1929 stock market crash, and the dot-com bubble burst are examples of big downturns in financial markets.
Yes, these crashes led to substantial losses, but markets have shown resilience and the ability to rebound over time. The past is of course not a prediction of the future, but these historical events are still relevant as they provide valuable lessons and insights into market behaviour and the potential for recovery.
You will hear some investors say that "it's different this time" and that the current market conditions are unique and unlikely to follow historical patterns. Sure, take note of the market landscape, but remember to approach such claims with a clear head.
It's impossible to predict the future, and basing investment decisions on the assumption that the rules of the market have fundamentally changed could lead to expensive mistakes. That’s why we always recommend that investors should focus on sound investment principles, such as diversification and maintaining a long-term perspective, and avoid making rash decisions based on fear or speculation.
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