How to figure out if you want to just test the investment waters, or take the full plunge

Swimmers cool off at Bondi Beach. (Photo by Mark Evans/Getty Images)

With summer now in full swing, the ocean has warmed up sufficiently for me to start my annual “swim season”. I’ve always enjoyed bodysurfing – once I’m in, that is. Not being one for cold water, getting in is the problem.

There are many who are advocates of the “plunge in and get it over with” approach. My view is avoid unnecessary “pain” whenever possible, so I’ve developed a process that involves, what I would call, a phased approach. I get used to the water up to knee level, then waist, then a splash around the face and neck, and then all in. It works for me and while in my younger days I had to accept the peer scrutiny that came with it, over time I learned that it worked.

Be comfortable with your way

When entering the investment markets, there’s no perfect way to do it. What’s most important is to be comfortable with your way. Investor behaviour is the greatest contributor to investment performance and regret is one of the key influences on investor error. So being comfortable with the prices paid for investments will go a long way to avoiding bad decisions later.

Investment data exists in various forms for up to 200 years and for the US markets we have very detailed data back to 1926. Over this time, it would have generally been statistically better to have “plunged” into the markets most of the time. It makes sense because market prices have risen over this time so the sooner the investment is made, the greater the return.

Balance statistics with specifics

However, investors have individual investment horizons – statistics only provide guidance around broad principles. Investors invest real dollars over a real lifetime – not statistical averages. So, whether to plunge in or wade in will depend on several factors, including:

  • Risk propensity and risk tolerance – how much risk is comfortable upfront and what is the tolerance of negative performance? Losses are felt twice as great as gains, so avoidance is more important.
  • The price at the time – after major price falls, it is easier to invest quicker
  • Time horizon – the longer the time horizon the more rapid the plunge. A 25-year-old investing their superannuation wouldn’t be phasing.

Phasing in is all about regret avoidance: avoiding feeling that the original decision was wrong. It’s as simple as applying whatever method makes sense logically, and wouldn’t be regretted no matter the outcome.

Many methods

There are many methods to phasing and “dollar-cost-averaging” is just one. This is where the investment is made over a fixed time horizon in equal instalments at regular intervals. An alternative, known as “value averaging” is based on phasing in over a period, but where the primary determinant is price. If the price falls, more money is invested. In both cases, the total investment will be completed within the agreed timeframe.

As we continue through this period of increased volatility, for those with money to invest it has become that much more important to be comfortable with the method and timing of investments.

I seldom regret my method of entering the ocean for a swim – there’s no real downside. However one of the regrets I do have, is that I didn’t take as much risk as I should’ve. Finding the most appropriate method as early as possible in life is an exercise worth pursuing.

Justin Hooper is the managing director of Sentinel Wealth and a financial strategist, speaker and author. In a supplement recently published in The Australian newspaper in conjunction with Barron’s, he was named one of Australia’s top 50 financial advisers in 2018.

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