Should I Wait To Invest?

“Should I wait to invest?” is a question many people are asking as the global stock markets seem to continue their ascent to new highs.

You may be forgiven for thinking that because the markets are at record highs a correction is due. This may well be the case, but equally it may not be. Just because you flip three heads in a row it doesn’t automatically follow that the next flip will be a tail and there is no evidence that any given stock market reaching a high point results in a near term crash.

The stock markets will go significantly down at some point. It may be next week, it may be next month but it may not be for another year or more. However, whenever it occurs sitting on the side-ines and waiting is not sensible if your financial plan has determined you need to take investment risk to achieve your goals and you have the capacity and time frame to suffer from market falls.

Which is why I’m surprised about an article that Carl Richards wrote recently. Carl is a US financial planner, blogger and speaker and I am a big fan of his work (his podcast are well worth listening to if you are starting out on something big) but I don’t agree with the article. In it he suggests that if you are scared of investing now because the markets are high then don’t.

I do accept the context he is writing in; he has taken on other risks in his life so is comfortable in not taking risk with his money but where one’s objectives are for long term growth the two things (having short term personal risks and long term investing for future financial security) are not correlated.

This is why aligning your wealth to your personal objectives and timeframes is so important. In leaving the comfort of employment and starting up my business I moved all my and my wife’s ISA investments to savings because we need short term capital to support the income shortfall we have. However, our existing pension funds and mortgage ISA remained entirely invested, and at a high level of investment risk, because I know we can suffer short term falls for the long term gains stock market investing brings.

Waiting to invest because you are fearful of market corrections is a form of hyperbolic discounting; putting a greater importance on short term rewards than long term rewards. “I know the markets will be higher in the long term but I can’t stand the thought of losing money in the short term.”

One way around this is to drip the money into the markets over time. This enables you to benefit from Pound Cost Averaging; when markets fall, each time you make an investment you are buying more units (shares) per £1. When markets recover you are holding more units overall and so the returns are greater.

I’m actually doing this myself with a Defined Benefit pension fund I have recently transferred to a private pension. Because it has come across as a cash payment I have decided to phase into the markets over the course of a year.

This approach isn’t guaranteed to generate higher returns because if markets continue to rise you are buying fewer units per £1 but it is way to dip your toe into the water if you are nervous about the immediate direction of the stock markets. I might find that by the time the fund is fully invested the markets have gone up but I’m not waiting for the crash to happen, I’m actively investing over time.

So, if you are asking “should I wait to invest?”, if it is because you can’t afford the losses then, yes you should. But if it is just because you don’t want to see a short term loss despite your long term time frame, then, no, you shouldn’t. Start investing even if it is bit by bit. In the long run you should be grateful you did.

Remember too that as stock market crash only creates a fall in value of your investing not a loss. It is only a loss if you sell and go to cash.

You might like to read this article on a similar theme: Investing is Simple Once You Block Out the Noise



Picture credit: Carl Richards @behaviorgap

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