Buy low, sell high. This is among the first rules of investing we learn, but seriously, how many of us are able to apply this simple adage consistently with our personal investments?
Fear and greed often cloud our investment decisions, causing us to miss opportunities when markets are unduly weak and over invest at other times when markets are booming.
Having come out of a year that has gone down in history as one of the worst for stock markets since the 1930s, investors are naturally in a quandary as to whether they should invest now, wondering if markets have truly bottomed, or will decline yet again.
As sharp sell offs are often followed swiftly by brief rallies, market timing -- or seeking to invest a lump sum at a specific point of time -- might be beyond the realms of the ordinary investor, and it often comes with its own set of risks.
As investors prepare themselves for more volatility ahead and possibly more downside in the coming months, what would be a good investment strategy to adopt in these turbulent times for those with a healthy risk appetite and a long term horizon?
A good approach at this point would be to invest a fixed sum of money into an investment of your choice at monthly intervals, regardless of the unit price. Such a plan is often known as a 'monthly investment plan' or MIP.
Research has shown that periodic investment of a fixed dollar amount into a particular stock or fund can lead to a rise in the average value of the investment over time.
This is because through regular investment, more units are bought when prices are low, and lesser units are bought when prices are high (see example below).
Use the tool below to learn more about Dollar Cost Averaging
At the same time, this investment technique can significantly reduce your exposure to risk that usually comes with making a single large purchase during volatile periods.
Most MIPs are flexible enough to allow investors to decide exactly how much money they want to invest each month. This ensures that the sum that you invest is in line with your financial ability, and that it is adequately consistent to ensure effectiveness.
You also have a choice of starting or stopping your MIP according to your wishes. In this case, should your financial situation happen to change during the course of the investment plan, you can either increase the regular amount invested or stop the plan without any penalties incurred.
There is an added convenience as well, as you can usually arrange to have the predetermined amounts automatically deducted from your bank account. This effectively takes emotion out of investing and ensures that you are committed to putting aside money at regular intervals to meet your long term goals, such as having sufficient funds for your retirement and your children's university education.
Like most investment strategies, MIP is not a foolproof, guaranteed to ensure you do not lose money or enjoy profits throughout the investment period. Investors should still diversify their investments across asset classes and review their portfolios regularly, to ensure that it is in line with their goals and risk tolerance.
While it is not a sure win strategy, MIP is still a good technique for investors to adopt right now, given relatively low prices and roller-coaster markets. The first phase of a stock market recovery can sometimes be swift and unprecedented, and if you are not invested in the market at that moment, you may miss out on the attractive investment gains that such a recovery can offer.
