A classic question that does not have clear cut answer.
I could be said that there is no knowing the best time to invest, except in hindsight. This is because no one truly knows what will happen next in financial markets.
Financial markets are governed by two basic emotions: fear and greed.
In times of fear things are doom and gloom.
There is volatility and asset prices dropping. Technically this is the best time to invest as you're buying into the market at a low, and when things improve, you'll benefit from this with nice returns. But let's face it you need a strong stomach to invest when words like recession, inflation and market crisis are being bandied about (note people might also not invest at such times due to them not being able to i.e., job losses, less available funds due to higher mortgage rates etc.)
In times of greed things become quite jubilant
When things are going well people are all too happy to invest. It’s well known that 2021 was one of the best years on record for share markets. New investors were getting involved in share investing through platforms like Sharesies/Hatch at record numbers and things were quite jubilant. This was a time of greed as the ruling emotion.
Contrary to the doom and gloom times the times of investing fervor and excess are technically the worst time to invest. Asset prices are on a high (read: overpriced, just look at house prices in NZ in 2021) and people fall for the common human psychology phenomenon if recency bias i.e., it's gone up month after month therein it will continue to do so. Yet people jump in at this time and subsequently get burnt when things inevitably drop.
So, what should I do then? When do I invest?
Invest during the doom and gloom and feel sick watching it choppily go up and (probably mostly) down? Invest during the high markets and then watch it (potentially) plummet if you bought at the height of the market before things correct to more realistic values?
The answer is there is no ‘right time’. Trying to time the market is a fool’s game
Time in the market will always beat timing the market.
In the below example using the MSCI ACWI* if you missed just a few of the best days in markets you would have dramatically less investment returns. Often the biggest gains occur immediately after a market bottom. Which means waiting on the sidelines for the ideal time to invest is not a recommended strategy.
* MSCI All Country World Index (ACWI) is a global equity index that measures the equity performance in both the developed and emerging markets - it covers more than 3,000 stocks globally
The only answer to when is the best time to invest is:
Invest as soon as you are comfortable doing so and then stick it out through the ups and downs. If you have investment goals / financial goals, the right mindset, a good sense of investment horizon (investment timeframe) & are confident you are investing in something appropriate to your investment risk profile then you are ready to take the plunge.
Some things that may also help with your confidence in getting started investing in managed funds specifically:
If you have a Kiwisaver fund you are already an investor, plain and simple. This means you’ve already got some experience with investing. You are already exposed to the volatility of markets with the ups and downs of your Kiwisaver value and it (hopefully) doesn’t keep you up at night.
Remember time is your greatest ally when it comes to investing (as it flattens out the dips in the market). Ensure you keep your investment horizon and goals in mind. This is will help keep things in perspective.
If you have a large lump sum to invest but the idea of it going down in a big way shortly after investing makes you feel sick then you can alternatively invest in stages i.e. split the lump sum into say 4 parts and gradually invest over weeks, or months. This staged approach can be a good technique for those of ‘conservative’ risk profiles especially, or those who can’t help but commit the investment sin of looking at their investment balance/value too regularly.
Your managed fund investment value may go down but it will go back up. If you are investing in a diversified range of investments (like a diversified managed fund) you can almost guarantee it will rise back to (and hopefully surpass) its previous highs.
The above blog was written by Reid Mckenzie a financial adviser working for Mckenzie Financial Planning (www.mckfp.co.nz).
The above information is general in nature as is not meant to constitute personalised financial advice. Reid recommends seeking personalised financial advice from a registered financial adviser before making financial decisions.