Wednesday, 28 August 2019
Written by Matthew Stuart-Box, COO, Head of Investment Platform
Many investors worry about timing their investments. In other words, trying to decide when is a good time to start investing or add to their positions and when they should hold off.
For financial assets whose prices change constantly, is it better to buy when they are cheap? It is often said that the best time to buy is when the market (stock price, etc.) is down but, in practice, this is not so easy.
Financial markets, such as stocks and bonds, tend to fluctuate through time. You may hear from economic news or newspapers that “Stock X went up” or “Bond Y went down” this month but, a few months later, these price movements may have reversed.
Consider the case shown in the above diagram. For example, suppose you buy $300 worth of stock. How many can you buy in February? $300 ÷ $150 = 2, so 2 shares. How about in March? $300 ÷ $50 = 6 i.e. 6 shares. If the stock price changes as shown in this figure, the cheapest purchase time is March. If the price of stocks purchased in March then rose, you could say that you were able to gain more than you did in February. In this way, you can see that the best investment timing is “when the market (stock price, etc.) is falling”.
But it is difficult even for professionals to judge that “the right time is right now”. So, does this mean that we should continuously check the prices of securities and make an investment when they go down? Of course, it is not as easy as that.
The market continues to fluctuate every day. Even if you think it's at the lowest point now, it may go down the next day and the day after. Also, it may get higher and higher while you are waiting for it to go down. Deciding when to buy low and sell high may sound like the goal of a professional fund manager at a large asset manager or a day trader who makes his living from his investments.
But, are all day traders successful? Are all the people who are entrusted to the fund manager making money? Unfortunately, that is not the case. It's difficult even for professionals to time the market. The smartest way to invest is to start “regular investing" as soon as possible.
MYTHEO is a long-term diversified investment service. Unlike short-term investments such as day trading, long-term investments are a more stable way to build assets.
There are two points to keep in mind when making long-term investments.
The first is “regular investing” i.e. adding money at regular intervals rather than all in single shot. This reduces the risk of investing too much when the market is expensive.
Investing the same amount on a regular basis is called “dollar cost average method” and is a popular way of investing. By investing the same amount regularly, regardless of whether the market is high or low you can reduce the risk of suffering a large loss. If you continue to invest fixed amounts at regular intervals, over time, your purchase prices will be averaged out. Also, by setting up an automatic bank payment on a fixed date each month, you can invest for the long term without being influenced by short-term market fluctuations.
Another key point about long-term investment is “compound interest”.
Einstein called compound interest “the 8th Wonder of the World”, so let’s talk a bit about it.
When you invest, you usually receive some kind of “return”. For example, if you start to invest with an annual return of 10% and a principal of $100, the return is $10 in one year. The second year will be 10% of $110 = $11. In this way, return is earned not only on the principal but also on previous gains. This effect is called “compound interest”.
If you are investing while controlling risk, you might only get an interest rate (return) of a few percent a year. However, by investing even a small amount regularly over 10 or 20 years, there is a clear difference compared to just depositing at a bank.
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You can see that getting started quickly helps with asset building. Considering that, it's best to start investing today rather than worrying about when is the best time to start. So why don't you start by making a deposit right now? You can open a MYTHEO account online in a few minutes and as a general rule, your cash will be invested on the same day as it is received.