There is no simple answer to this question because while it may be the right time today, will it be the right time tomorrow? As we mentioned in one of our earlier articles, many believe the stock market looks forward at least nine months, so the financial headlines today may not necessarily correlate to future prospects for the stock market. This prompts the question, when is the right time to invest in the stock market?
Today’s prices are the only certainty
While you may have a broad opinion as to how stock markets might perform in the short to medium term, the reality is that today’s prices are the only certainty. With the best will in the world, it is challenging to forecast tomorrow’s price movement, let alone those months or even years down the line, with absolute confidence. Where does this leave us concerning the right time to invest in the stock market?
Long-term strategies flatten out volatility
If you focus on short-term volatility in stock markets, looking to buy at the low and sell at the high, you could be waiting a long time. This very rarely happens. As a trader, you may benefit from short-term volatility, but this means watching the markets like a hawk, and there is significant risk.
Conversely, if you look forward years, not months, weeks or even days in advance, history suggests you have a higher potential success rate. Nothing is guaranteed, but the statistics show that long-term investment gives you a greater opportunity to bank gains compared to short-term investors. This is because:-
- It removes the element of timing, or mistiming, when you buy into the market and when you sell. For many, being out of the market in the long term is the most significant risk.
- As recessions are typically significantly shorter than periods of economic growth, markets tend to spend more time in a positive trend.
- Short-term liquidity issues can influence short-term share price volatility, whereas long-term trends are more based on fundamentals.
The likes of Warren Buffett perfectly reflect the benefits of taking a long-term view of stocks, markets and investments in general. While it makes sense to try and “time” your investments and disinvestments, if a stock looks good value today on a long-term basis, why wait until tomorrow?
Can you benefit from short-term market volatility?
While we have identified several benefits for long-term investment, there are ways of benefiting from short-term volatility, even as a long-term investor. Rather than investing your funds in one go, drip-feeding them regularly over a long period can be hugely beneficial. This is often referred to as “pound cost averaging” and works as follows:-
Regular monthly investment: £1000
Month One
Share price: £2
Investment: £1000
Number of shares acquired: 500 (excluding costs for this example)
As a consequence of market volatility, the situation the following month is as follows:-
Month Two
Share price: £1
Investment: £1000
Number of shares acquired: 1000
In this example, we assume that as an investor, you have identified long-term potential for the share and are willing to accept any short-term volatility. After the investment in month two, you have:-
1500 shares at a cost of £2000 with an average price of £1.33 a share
If you had invested all of your money, £2000 in total, in month one, then you would have had just:-
1000 shares at a cost of £2000 with an average price of £2 a share
There is obviously a danger that the share price increases after your initial acquisition in month one, but even in a worst-case scenario, the shares you acquired at the beginning have increased in value.
The idea behind this concept is simple; if you see long-term value in a share or individual market, regular monthly investment allows you to take advantage of short-term volatility. Even though you may be confident in the long term, nobody knows what the share price will be tomorrow.
Summary
Where there is no risk, there is no return, so whether looking at short-term trading, long-term investment or regular monthly investments, there is a risk. Statistically, long-term investment allows you to flatten out the peaks and troughs of short-term volatility and, hopefully, benefit from long-term fundamentals. Regular monthly investments are a means of potentially benefitting from short-term volatility within a long-term investment strategy.
It’s essential to take a long-term view with investment, ignoring short-term fluctuations while focusing on long-term fundamentals. As an investor, trying to time each of your trades perfectly is like chasing the pot of gold at the end of the rainbow; you never quite get there.
If you would like to discuss the benefits of regular long-term investment, please feel free to give us a call, and we can discuss the situation in more detail.