When’s the best time to invest?
Have we missed the boat or is it worth waiting a bit?
In short, nobody knows. I could really end the article right there, but that would just be stating the obvious and not very helpful to anyone.
Lots of people claim that they have the key to buying low and selling high, but anyone with experience of investing will tell you that whenever and wherever you choose to invest your money, you will soon discover that by pulling the trigger a little earlier or just a little later, you would have been better off. Whether marginally or considerably is the only real variable.
The truth is that the best time to invest is only ever visible in hindsight, yet we are still psychologically programmed to try and predict it. The vast majority of us will umm and err about whether we should be selling a stock today, buying a fund tomorrow or waiting to put the house on the market until just after next festivus in order to achieve optimum results. So how do we avoid this cognitive bias that feeds procrastination and disappointment?
There’s a simple, but perhaps counter-intuitive solution to timing your investments: Settle for second-best.
The start of 2022 brought with it high volatility, rising inflation and negative movements in many stock markets, causing many people to think about delaying their plans or to rue the movements they made a few months earlier, but for most retail investors a period of negativity or economic uncertainty is largely irrelevant. The trick is to tune out the external noise and come back to the reason for investing in the first place: Your targets.
Target-based investing tries to look beyond short-term or cyclical movements in the markets and focus on the reason any individual wants or needs to put their hard-earned money to work. Instead of asking when the best time to invest might be, let’s just assume that we get that wrong. So when is the second-best time to invest? The answer to this is always going to be as soon as you have identified the target. If you know what you are working towards, the second-best time to start building towards that objective is right now.
As long as your investment structure allows you the flexibility and liquidity that you need in the short-term, and the framework to achieve your targets with the minimum risk in the given timescale, you can be very confident that you picked the second-best time to start working towards your goals.
Every target-based investment is a journey with a defined endpoint. I often use the analogy of setting off for a foreign vacation. To make an investment purely based on immediate returns and short-term results is like packing your suitcase, heading to the airport and jumping on a flight with no idea of the destination. There’s a significant chance that you will arrive unprepared, under/over-dressed and out-of-pocket once you realise where you have ended up and dip into your savings to remedy the situation. In contrast, basing your investment decisions on the goal is more like booking your flights and hotel first, so that you are clear on the destination before you even consider dusting off the luggage set. With this attitude, you will pack your bags and leave the house with plenty of time to catch your flight, regardless of whether it’s raining buckets on the way to the airport. It might not be the perfect time to set off, but the second-best time is obvious.
A key to this attitude is to maintain flexibility in your plans. Locking yourself into a fixed structure or strategy leaves little room for adjustment in case things don’t go to plan on the way. A rigid and inflexible investment assumes that the investor picks the best time, assets and structure for their needs. Flexibility allows for ‘what-ifs.’ A flexible, target-based approach states loud and clear
“I know my targets. I have a plan. The second-best time to work towards that is right now.”
I feel the need to emphasise here that I’m not trying to encourage you to jump into (or out of) an investment the moment you think of it. I’m saying that you should make that move as soon as your targets demand it. If you haven’t yet defined what you are working towards, speak with your financial advisor for some help in identifying and quantifying the things that you want and need for your future. If you already know the destination, it’s time to start preparing for the journey.
The best time to identify your goals and plan for whatever comes next is right now. That also just so happens to be the second-best time to invest.