If you started getting financially organised this year, then you should have set yourself some outcomes in January. The Money Plan is a book and a system I created to getting people on track, which includes splitting the year into quarters where you can ‘check in’ to assess your progress towards your goals.
By Q4, those following the plan will have financial foundations in place, including a will, lasting power of attorney and an emergency reserve of cash. Some people will be in the phase of paying down their debt; others will be considering investments and saving for the future, which often means investing in the stock markets.
The markets have been very volatile lately. There are two main reasons for that: first is the uncertainty caused by events around the world, from the trade stand-off between the US and China, Brexit and its impact on Europe, and the mid-term elections in America
The stock-market is a forward-thinking machine and because politicians don’t know what the outcomes of these and other events will be, the market doesn’t know either. That causes concern, and prices go up and down accordingly.
The second reason for the volatility is the widespread rise in interest rates globally, which among other things is causing companies to pay more when they’re looking to borrow to grow.
My feeling is that we’ll continue to see volatility as we move into and through 2019, with neither of the reasons above going away anytime soon.
People can get nervous about investing when the market is fluctuating, but it’s important to remember that when you’re investing you should be in a long-term mindset – preferably at least seven years or more and it’s important you have a future vision, a reason why you’re investing in the first place.
You can reduce your risk by investing in instalments. If you’re investing on a monthly basis rather than with a lump sum, you’re doing what’s called pound cost averaging. By investing at regular intervals, in a volatile market you’ll be purchasing more shares when prices are lower and fewer shares when prices are higher. If the markets do fall then pound cost averaging is advantageous.
So should you wait? The numbers say not.
The long-term return of the FTSE All Share is around 9.5% per annum on average. I’d always recommend people diversify globally, buying into collective investment funds around the world, which may also add a further premium to that figure.
The current returns on deposits and savings is somewhere around 1.5% at best. Although if you invested in the market now you might see it fall in the short-term, you shouldn’t be investing for three, six or 12 months; you should be investing for five to seven or more years.
Put simply, you’ll never be able to predict when the market is in terms of buying in at the bottom. That’s why we have an adage in financial planning: the best time to invest in the market was yesterday. The longer you’re in the market, the better your experience will be.
If you’re investing a chunk of money which is considerable to you and you’d feel nervous if it quickly fell in value, then phase the money in over six months, a year or longer if you need to. This way you’ll take advantage of pound cost averaging, but if the markets do rise, you’ll just have to put it down to a learning experience.
Academic research proves that pound cost averaging isn’t the optimal way to invest over the long-term, because most of the time the market is going up so you’d be better off putting your lump sum into the market in one go. But I’m a big believer in psychology and if you’re going to lose sleep at night, it’s not worth it – phase your money in over time and you’ll feel better about your investment experience.
Warren Shute MSc. is a multi-award winning Certified Financial Planner and author of the bestselling personal finance book The Money Plan available on Amazon for £11.79.