Even the most experienced investors can make costly mistakes
The common adage ‘buy low, sell high’ might seem like a fool proof strategy for maximising investment returns. However, the reality is far more complex than simply trying to predict market fluctuations. Timing the market involves anticipating its highs and lows to buy when prices are at their lowest and sell when they peak. Many factors, encompassing both the economic and political spheres, can influence investment markets. Formulating investment decisions by considering all these factors is a formidable task. While it’s easy to identify apparent signs retrospectively and missed opportunities in past market trends, it usually needs to be clarified in real time.
Consequently, even the most experienced investors can make costly mistakes. Attempting to time the market consistently is virtually impossible. Even seasoned fund managers, backed by dedicated research teams and resources, can sometimes get it wrong.
‘TIME IN THE MARKET’ INVESTMENT STRATEGY
So, if market timing isn’t an effective strategy for the average investor, then what is? A famous saying among many investors offers a clue: ‘It’s not about timing the market, but about time in the market.’ Enduring volatile periods can be stressful, especially when the value of investments falls. A ‘buy and hold’ investment strategy often proves more effective. Building a diversified investment portfolio tailored to your risk profile is critical. Holding these investments over a long period can yield more consistent returns than attempting to time the market.
Market dips can make it challenging to stick to your long-term investment plan. However, for most investors, this approach works. Since market volatility is inevitable, investing with short-term goals in mind isn’t advisable. Ideally, it would be best if you planned to invest for a minimum of five years, which allows the ups and downs of the market to even out.
SMOOTHING OUT THE MARKET’S FLUCTUATIONS
This strategy is often referred to as ‘pound cost averaging’. This strategy can help smooth out market fluctuations and reduce overall risk. Predicting the perfect time to enter or exit the market can be highly challenging, and investors often face the danger of investing at the peak of a market cycle or withdrawing at the lowest point. The comparison between pound cost averaging and lump sum investing is crucial in investment decisions.
NAVIGATING MARKET VOLATILITY
Regularly investing can result in a lower average purchase price than a single lump-sum investment at the market’s peak. Consistent investments over time can help flatten the market’s highs and lows. Pound cost averaging involves consistently investing a set amount, irrespective of the market’s ebbs and flows. In contrast, lump sum investing requires deciding when to invest. The principle behind pound cost averaging is simple. It can be done by gradually investing a large sum – for instance, investing £20,000 each month for ten months from a £200,000 lump sum.
Pound cost averaging can:
- Provide a methodical, disciplined investment strategy
- Alleviate the stress of lump sum investments made at inopportune times
- Offer a more steady and predictable entry into the market
- Assist in lessening the effects of declining asset prices
ADOPTING OPEN-ENDED INVESTMENT STRATEGIES
Alternatively, you could opt for an open-ended pound cost-averaging strategy by investing £2,000 monthly. This approach ensures that you’re investing regardless of the market’s state. Pound cost averaging can also aid in limiting losses while cultivating a habit of disciplined investing and providing purchases at lower prices during market downturns.
ENHANCING SAVINGS WITH INCREMENTAL INVESTMENTS
However, any costs associated with regular investments may decrease the benefits of pound cost averaging. These costs depend on the charge relative to the investment size and the frequency of investment. As time progresses, you’ll likely be able to increase your monthly investment amount, thereby giving your savings a valuable boost. Regardless of the investment size, committing to regular savings over an extended period can accumulate into a significant sum.
Who are Vizion Wealth?
Our approach to financial planning is simple, our clients are our number one priority and we ensure all our advice, strategies and services are tailored to the specific individual to best meet their longer term financial goals and aspirations. We understand that everyone is unique. We understand that wealth means different things to different people and each client will require a different strategy to build wealth, use and enjoy it during their lifetimes and to protect it for family and loved ones in the future.
All of us at Vizion Wealth are committed to our client’s financial success and would like to have an opportunity to review your individual wealth goals. To find out more, get in touch with us – we very much look forward to hearing from you.
The information contained in this article is intended solely for information purposes only and does not constitute advice. While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article.
