Mark Lister, 2 December 2020

You’ve sold the business or the farm, maybe got out of the rental property game, or simply downsized and moved into a smaller place somewhere with better weather.

One way or another, you’ve ended up with a tidy sum of surplus cash. Having spent a good few decades working to amass this nest egg, you want your money to work equally hard from here on.

For those fortunate enough to be in this position, it can be nerve wracking thinking about venturing into financial markets (or any asset class, for that matter) with your life savings.

If markets have been going well (like they have recently), you wonder if you’ve missed the boat. If we’re in a slump, it feels much safer to wait for the future to look more promising.

subscribe banner

Many people tie themselves in knots over these sorts of decisions and end up doing nothing at all. That could be one reason New Zealanders have a whopping $200bn sitting in bank deposits, a lot of which is earning a very low return.

One option for how to deploy your hard-earned capital is to close your eyes, grit your teeth and invest the lot today.

Empirical evidence proves that this is a good option. Over the long-term, shares go up in about four out of every five years.

Put another way, at any given time there’s almost an 80 per cent chance you’re better off just getting on with it immediately, rather than waiting around for a better opportunity.

Having said that, you don’t want to be unlucky enough to invest right at the top. After all, a big driver of future returns is the price one pays at the beginning.

Maybe a better idea is to sit back and wait for the inevitable downturn, then take advantage of cheaper prices and get in at a much better entry point.

An excellent plan – although one that unfortunately requires a fairly accurate crystal ball, which most of us don’t have.

Markets could prove you wrong and keep doing well for a while yet, as you sit on the sidelines and earn a miserable return on your capital while you wait.

There’s also a good chance that in the depths of a decline, everything will look too scary and you won’t be brave enough to follow through.

You’ll probably wait until there’s clear evidence things are on the up before you make your move. By then you’ll have missed much of the rebound, things will be expensive again and you’re back to square one.

As with many things in the world of investing, being at one extreme or the other makes little sense. Diving in boots and all is imprudent, while waiting in the wings for conditions to be perfect can be equally futile.

A more sensible strategy is to put your money to work bit by bit. Split your lump sum into pieces and stagger your way into the market over time. Invest a similar amount each month or each quarter, spreading the total investment over a longer period.

The result will be a middle of the road outcome, but you’ll drastically reduce your chances of getting the timing completely wrong and winding up at the ugly end of the spectrum.

This approach is sometimes called dollar cost averaging or instalment investing, and it strikes a balance between taking control of your finances right away, but doing so in a way that is lower risk. It’s also more likely to pass the sleep test.

There are no precise rules around the timing of a strategy like this, or the dollar value of regular investments. That's something to work on with your financial adviser, and it will come down to your individual circumstances.

When it comes to developing an investment strategy, the best time is always now.

Regardless of your age, time in the market will arguably have the single biggest influence on the end result. The backdrop always feels risky, no matter the conditions, and there are strategies we can use to improve our investing outcomes.