Investing Cash During a Temporary Decline
Timing in investment markets is not something seasoned Financial Planners claim to do. This is not to say that it is impossible to get right on occasion, but long term, it is far more likely to achieve sub-optimal returns.
What do we do about declining markets if we can’t time them?
The financial literate sees a decline in the stock market (the great businesses of the world) as an opportune time to invest any excess cash. Why? One of the most mature investing concepts to master is that a declining-in-price market is a rising-in-value market. Inversely, a rising-in-price market is a declining-in-value market.
How we can demonstrate this?
The stock market has temporarily declined by -20% (or more) and you now wish to invest excess cash. At this stage clients fall into two camps:
- I have excess cash but I’m nervous that the market will decline further and I’ll invest at the wrong time
- I have excess cash but I’m nervous that the market will advance further and I want to get my money to work as soon as possible
Successful investors think in multi-decades, failed speculators think in multi-weeks. Investing cash during a volatile market heightens the key investing emotions, these being fear and greed. What are then some of the options for investing this cash?
This is an immediate course of action due to not being able to time markets and can be a good option as they generally rise 75% of the time and decline 25% of the time.
This is where a pre-agreed strategy is needed. Although it may have financial ramifications, emotionally it may feel better for the client. The idea here is to agree with the strategy at outset.
An example of investing excess cash could be:
- 25% slice invested day 1
- 25% additional slice invested day 30
- 25% additional slice invested day 60
- 25% additional slice invested day 90
The % amount and the specific day need to be agreed, which forms a strategy and a plan, the foundations for successful investing. Deviating from the strategy based on the market’s movements can have negative outcomes.
Another example of investing excess cash could be:
- 30% invested day 1
- 20% invested day 60
- 20% invested day 120
- 30% invested day 180
There’s no exact science to ‘drip-feeding’ cash, the important thing is to have a strategy and stick to it.
‘Wait and see’
This can mean a client wants to wait and see the market rise then invest, which can result in buying high. Others say they’ll wait for the market to decline further before investing, which also has drawbacks as a further declining market isn’t seen as an appealing investment opportunity.
If you would like to talk to a member of the team here at gpfm, please don’t hesitate to get in touch over email firstname.lastname@example.org or call 01992 500261.
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.
gpfm are an independent financial planning company dedicated to the provision of personal, professional, and objective-driven advice for our clients. We have been awarded the Chartered Financial Planners title by the Chartered Insurance Institute for offering high quality, independent and informed advice that meets the needs of our clients.