Tag Archives: investing

Should I invest a lump sum all at once or stagger it over time?

dollar_cost_averaging“Should I invest a lump sum now or drip it into the market over time?”  This is a question we’re getting more and more often.  As usual, the answer is not straightforward and of course … it depends.

Despite the declines last year and the early part of this year, North American stock markets seem to have continued their upward march and are now at peak levels.  European and Asian markets aren’t as close to peak levels but nonetheless investors are jittery and not sure if now is the best time to invest.

The US election is pending, Brexit implications are still playing out and the news generally tends to be doom and gloom.  It’s understandable why people might hesitate if they have a lump sum of cash sitting on the sidelines and are unsure if now is the best time to put it at risk.

It’s not only about expected investment returns

There are two distinct views on what to do with a lump sum.

The first is that it’s best to invest right away.

The second is that it’s best to spread your investment over time, engaging in what is commonly referred to as “dollar cost averaging”.  Dollar cost averaging might involve splitting your lump sum into four equal tranches and investing one tranche every three months over the course of a year.  In doing so, you’d smooth the impact of market volatility, maybe missing some good upward trends but also maybe avoiding putting all your money in at once just before a market crash.

What does the evidence say?  The academic research tells us that trying to time the markets is futile and at any given time we can expect a future positive return on investment.  After all, the market generally goes up, in fact according to Jim Yih of Retire Happy the annual return of the TSX stock index was positive 73.9 % of the time between 1920 and 2010.

So the odds are in your favour that you’ll be better off by investing now – certainly not guaranteed but expected to be positive.   Dimensional Fund Advisors (not that Nobel prize winners are always right but but this group has a strong evidenced-based approach to investments) say the following on this subject (from its website):

“Standard financial analysis says dollar cost averaging is suboptimal.  If you focus only on your investment outcome, investing a lump sum immediately lets you construct the best portfolio you can today; slowing the process with dollar cost averaging just keeps you in something other than your best portfolio until you are done.”

Sensible and supported by good math I’m sure … but not the whole picture.   They also go on to say:

“Behavioral finance provides a different perspective. Because of the difference between the way people react to errors of omission and errors of commission, dollar cost averaging may give investors a better expected investment experience.”

Essentially what this means is that while purely from an investment perspective the expectation is that one would be better off investing a lump sum today, it is not a certainty and when decisions have to be made when uncertain future outcomes are at stake psychology enters the equation in a big way.

An active decision to invest now followed by an unexpected poor outcome might scar an investor from making future beneficial investment decisions.  Surely there are many people who, scared and scarred by the market carnage in 2008/2009, sold out at the bottom and have remained on the sidelines through the subsequent rally.

Or imagine if you’d invested a large lump sum a couple of weeks before Black Monday in 1987 instead of smoothing it out over the following year or so.  You may find yourself hesitant to ever put money in the markets again!  Investors that are liable to suffer extreme regret from their own active decisions that turn out to be wrong (errors of commission) may find that spreading a lump sum investment over time eases the blow sufficiently to keep them invested and on track with their investment plan.

Figure out what kind of investor you are, make a plan and stick with it

Market crashes don’t happen very often and at any given point in time investors should expect a positive return.  This doesn’t mean that behavioural/psychological forces aren’t real and powerful.

So what are investors to do? To begin with, investors would be very wise to spend some time considering how they might react to various market scenarios – what kind of investor are you?  Are you unphased by market volatility and immune to external pressures like the press and market pundits?  Do you feel really nervous making a decision under uncertainty?

Try taking a risk survey or two to help gauge your willingness to take risk relative to other investors – a sort of investing gut check.  Try to imagine yourself in these situations and practice how you might feel and react.

Lastly, put a plan in place ahead of time – take the decision out of your hands – blaming the plan might be psychologically easier than blaming yourself if things don’t turn out exactly as expected.

Decide now what the best course of action is for you and document it in a well thought-through plan.  Then make sure to remember it’s often when the plan feels most uncomfortable that it’s most important to stick with it!

grahambodelGraham Bodel is the founder and director of a new fee-only financial planning and portfolio management firm based in Vancouver, BC., Chalten Fee-Only Advisors Ltd. This blog is republished with permission: the original ran on August 12th on Bodel’s blog here.

 

 

 

 

Investing is a Marathon, not a Sprint

Depositphotos_21614265_s-2015By Fraser Willson

Special to the Financial Independence Hub

The 2016 Summer Olympics is just getting under way in Rio de Janeiro. One of the most compelling events is the marathon, a 42-kilometre endurance contest with roots dating back to ancient Greece. It may be that we’ve kept our interest in the marathon because it can teach us much about life – and it certainly has lessons for investors.

In fact, if you were to compare investing to an Olympic sport, it would be much closer to a marathon than a sprint. Here’s why:

Long-term perspective

Sprinters are unquestionably great athletes, and they work hard to get better. Yet their events are over with quickly. But marathoners know they have a long way to go before their race is done, so they have to visualize the end point. And successful investors, too, know that investing is a long-term endeavor, and that they must picture their end results – such as a comfortable retirement – to keep themselves motivated.

Steady pacing

Continue Reading…

7 ways to cushion volatility in second half

Turtle with open mouthBy Adrian Mastracci, KCM Wealth

Special to the Financial Independence Hub

“Behold the turtle. He makes progress only when he sticks his neck out.” — James Bryant Conant, (1893 – 1978), American chemist.

Investors are on edge about the prognosis for the second half of 2016. Plenty of disarray, uncertainty and chaos is gripping stock and bond markets.

Companies will soon be reporting second-quarter earnings and future prospects. Revenue growth is the biggest challenge for companies in this environment.

The remaining central banks tools are losing effectiveness. Best to assume the second half 2016 is not a cakewalk, so be well prepared.

Some currencies have developed their own wall of worries. A sense of unease prevails as bond yields get even slimmer.

Investors may also be sticking their necks out like the turtle. Some of the risks present opportunities for the strong willed.

Consider these three pointers Continue Reading…

The “Brexit” no one saw coming, and what to do next

Polling financial literacy: results both encouraging and worrisome

graham-bodel
Graham Bodel

By Graham Bodel, Chalten Advisors

Special to the Financial Independence Hub

The Canadian Securities Administrators (CSA) just released its 2016 CSA Investor Education Study, an assessment of financial literacy across the country.

Some of the findings are encouraging while others are a little bit worrying.

There are clearly still key gaps in investor knowledge and behaviour.  For example, while many investors rely exclusively on advisors for investment information and knowledge very few investors actually check to see that their advisor has the appropriate registrations.  Some other key points:

Risk Tolerance

To begin with, findings show that more and more people seem to be paying attention to their risk tolerance, which is great!  Risk tolerance is what should drive the mix of different investments that you hold, often referred to as asset allocation.  Risk tolerance is driven by your need, ability and willingness to take risk and should be informed by your current financial situation as well as near and longer term financial planning goals.  Risk tolerance can definitely change as your circumstances change or as you enter different stages of life so it is worthwhile checking periodically to ensure your investments are suitable for your risk tolerance.

Investment Knowledge

Survey respondents were asked to answer seven questions to assess general investment knowledge.  6 of 10 people answered 4 or more questions correctly, which is about the same as in previous surveys.  25% of respondents answered 6 of 7 questions correctly indicating a “high” level of investment knowledge.

Continue Reading…