As the adage goes, buy low sell high. However, timing of the market is extremely hard to do and with the tumultuous times we are living through currently, it seems impossible. The fact remains that the best time to invest is when you have the money available and the best time to take it out is when you need it. The investment choice will be informed by the time between those events. If you are investing for long term, you can afford to take on more risk than if you are a short-term investor.
Recent years have been a volatile time in financial markets, covid dominated the news cycle for the last 2 years and now we have the war in Ukraine, inflation and supply chain issues which seems to have spooked investors. The constant negative media coverage has led to a sense of investment paralysis. This despite interest rates being at all-time lows and savers getting no value for money being held on deposit.
Currently there is approximately €126 billion sitting on deposit from Irish retail investors and savers. The natural alternative to this is investment funds, however, many have taken a view to leave money on deposit until the markets ‘sort themselves out’. This rails against all investment logic but is understandable from a human nature perspective.
So how can investors avoid putting their money in the market right before a crash. Timing risk is a real concern for many. We can try to predict how markets will perform based on analysis of what’s happening in the global markets but it’s difficult give a definitive answer. Of course, this should only be a concern for lump sum investors. Regular savers and investors can benefit from ‘unit cost averaging’ so a period of market volatility can actually be seen in a positive light.
Some investment companies have adapted the lump sum investment process to cater for this concern and attempt to reduce timing risk. A phased investment strategy, where you drip-feed your funds into the market over a period of time takes advantage of a concept often referred to as ‘unit cost averaging’. This involves purchasing the same euro amount of units in a fund at set intervals over a period of time. This can be done over a period of 6 or 12 months.
For example, Mary wishes to invest €120,000 but is concerned about the timing risk involved in today’s market. She can then place the €120,000 with an investment company, they will then invest €12,000 of her fund on the first of each month. If a market shock occurs a few months after Mary’s investment, her future contributions to the fund will be buying in at a lower unit cost rate and Mary has reduced her exposure to timing risk.
Cautious investors, from a behavioural perspective, don’t necessarily concern themselves with getting the best possible return, but more with avoiding the worst possible return. As shown in the well-established concept of loss aversion – people tend to strongly prefer avoiding losses to acquiring gains. The peace of mind that can accompany drip feed investing with a drip feeding strategy can be a powerful tool.
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