SHOULD THIS MARKET WEAKNESS STOP US FROM INVESTING?
Mark Lister, 11 March 2022
Investing is never easy.
When prices are cheap it's usually because the economic climate is looking dicey and there are loads of things to worry about.
When the outlook is rosy, prices have often already moved to reflect this and there are few bargains to find anyway.
A lot of investors feel like they’re at a bit of a crossroads right now. Do they carry on as they have been, get ready to back the truck up, or bail out completely?
Inflation is rampant, central banks are preparing to take the punch bowl away, and the war in Ukraine is causing all sorts of issues with the price of oil and other commodities.
For experienced investors with established portfolios, this isn't as much of an issue.
They are already sitting on healthy gains from the past 18 months (if not many years), while dividend and interest payments keep rolling in on a regular basis.
If they’re edgy about current conditions, it's easy to take a bit of risk off the take, rebalance into safer assets (which look more attractive now interest rates have increased) and hedge their bets.
For newer investors making regular contributions, things feel more challenging. World shares are down more than 12 per cent in 2022, and they could easily go lower.
Do you keep doing your regular buying as you watch the market fall, or should you put those plans on ice until the coast is clear?
I would suggest staying the course.
Markets can rebound sharply after a period of weakness, and they often do so before its obvious to everyone things are improving. Even if you avoid some of the weakness, if you miss the rebound you’ll have achieved little.
If you’re regularly contributing to an investment plan of some sort (and that includes KiwiSaver), you'll end up buying some assets at high prices but also some at much better prices.
Putting your money to work bit by bit is a very sensible strategy, particularly for younger people or investors with a lengthy time horizon. This approach is sometimes called dollar cost averaging, or instalment investing.
The result will be a middle of the road outcome, and the bargain-hunter in you might even start looking forward to the inevitable corrections along the way.
Those who held their nerve during the weakness of 2008, March 2020 or anything in between will no doubt look back fondly on some of their lucrative purchases during those periods.
The same logic can be applied to those with lump sums they would like to put to work.
Jumping right in with the proceeds of your property, business or farm sale is highly disconcerting. The obvious worry is that you'll get your timing dead wrong and end up making your investment just before things go pear-shaped.
Doing nothing doesn't make complete sense either. All the stars rarely align, and people sometimes end up permanently on the sidelines, avoiding most of the risks but also most of the returns.
The best way to approach a market like this is to invest your lump sum in instalments, rather than all at once. By splitting your capital into several pieces and investing it over the course of six months, a year, or even longer, you’ll reduce a lot of the market timing risk.
The usual rules of keeping well-diversified still apply. However, you can certainly target the markets, companies or funds that look better value first.
Don't be afraid to hold a little more cash than usual either. Having a bit of dry powder is useful for taking advantage of opportunities if they arise, which they always do.