Investment Strategies

Markets are perceived as inherently risky because they tend to crash. There is always something going on to destabilise the markets. And even when markets are stable, that can be destabilising as well as people become too optimistic. When people get optimistic they go into debt. And when they go into debt, the economy becomes unstable. That might sound cynical but really is an inevitable part of the rollercoaster that has nonetheless swung consistently upwards over the course of hundreds of years, all driven by human ingenuity and innovation.

So when should you start investing? Ideally, you want to go in at the bottom of every dip you see in the chart above. In hindsight that looks incredibly easy to do. The market doesn't usually do what you expect it to do. It anticipates events and its economic repercussions by as much as six months in advance, leaving you scratching your head at the market's reaction to certain situation. Think of the stock market as a window, not a mirror. The best you can do is to take a leap of faith and trust things will work themselves out. Markets have always recovered and reached new highs after every crash, so these dips are your opportunity. It can feel scary, especially in times of uncertainty so it is helpful to have a long-term investing plan. There are two types of investing strategies people are usually advised to follow, both of which have their benefits and drawbacks.

1. Systematic Investmentent Plan (SIP):

Refers to the practice of investing an equal amount of money at set intervals. Such as £500 of every month's pay check (an interval of ~30 days). Over time, this practice avoids any attempt to time the market and evens out the impact of market fluctuation so you are "dollar-cost averaging" (DCA) your investment over time. This type of investing works well for exchange traded funds (ETFs) and does not require much attention to the market. Empirical evidence suggests that this strategy is, however, inferior in terms of market returns when compared to other strategies. Yet, as this investment strategy requires no attention to the market, Warren Buffet believes this type of investing to be the most suitable strategy for the majority of people. It is systematic and creates the habit of investing regularly.

2. Lump-sum Investing:

A 10% pullback is almost as frequent as summers. That can be an emotional experience, make us panic and act irrationally. This is why it is important to have a plan in place. This is what lump sum investing refers to, the systematic investment of a set amount of money based on the percentage by which the market falls. Have a look at the below chart for an example of how such a plan could look.

These figures on market drops and their frequency are based on historical averages and should not be relied upon in these exact intervals. But when they do happen, the lump sum investment strategy aims to take advantage of it. However, it requires watching the market a little more closely. It is also noteworthy that a 10% of a grossly overvalued market such as in 2000 in the US, and in 1989 in Japan, ought to be ignored. These markets deserve to drop more than 10% before they become investible. This type of investing though a little more time consuming, has produced greater historically returns. The approach is suitable for ETF investments as well as individual stocks, which may not both fall in tandem, and hence requires a watchful eye.

The bottom line is: Have a plan, stick to the plan.