When is the Right Time to Invest? How to Avoid the Procrastination Penalty
Other than regular investments made from payroll contributions into retirement savings plans, sometimes individuals come across significant lump sums from unique financial events such as an inheritance, the sale of real estate, the redemption of company stock, etc.
When financial markets are in disarray, many investors may be reticent to make decisions concerning large lump sums, simply because of the perceived risk involved. During times like these, it’s very easy to rationalize that it’s too risky to invest, and to postpone any investment decisions until market conditions improve or become “safer”.
Unfortunately, this is a perfect example of incorrect thinking for two reasons. First, when considering any investment strategy, it’s important to use a number of diverse investment categories whose risks tend to offset one another. Not all investments are equally risky, nor do they exhibit the same risk at the same time (usually). More importantly though, the opposite reasoning is even more compelling –
You don’t want to buy more shares of anything when prices have already gone up (the market is “safe” now). Instead, you want to buy more shares of something when prices are going down. Therefore, a declining market represents a better investment opportunity than an increasing market. The goal is to buy low and sell high, not buy high and sell low.
The primary reason why most investors think in reverse is because they are not thinking logically, but emotionally. That said, taking advantage of a specific investment point doesn’t guarantee that prices can’t go even lower – that’s why it’s better to introduce contributions into riskier assets progressively rather than all at once during periods of market volatility. This process is more commonly referred to as dollar cost averaging, which literally means that an investor is reducing investment risk by investing in intervals rather than all at once.
However, dollar cost averaging is impossible without establishing a brokerage account which allows an investor to make such purchases more strategically. Furthermore, when working with an investment advisor, an investor may grant an advisor discretionary authority, which allows the advisor to call the shots concerning how funds are introduced into certain investments and when. This can alleviate the investor of the concern whether or not they are timing their purchases sufficiently well by abdicating the execution of trades to their advisor.
Recall that “timing the market” is usually a failing strategy. On the other hand, separating purchases over a number of intervals requires less reliance upon market timing than trying to decide when to fully invest an entire lump sum - that’s the advantage to dollar cost averaging as a risk reduction technique, and meanwhile, you have a greater percentage of money going to work for you rather than allowing the entire balance to sit as cash earning essentially zero interest.
During periods of acute volatility, astute investors and/or their advisors will purchase even more shares when the market drops, but fewer shares (if any) on days which the market substantially rises. On the other hand, if the market sharply reverses course, you and your advisor may decide to revise your purchase decisions accordingly…but this flexibility does not become available until you decide to take action upon it; otherwise, you will surely suffer the penalty of indecision – the procrastination penalty. How much has the procrastination penalty already?
Neil H. Gendreau, CFP, ChFC
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC.