As investors we often get to a point where the market is going down at the same time we have money to invest. We are confronted with a choice: invest now or wait for the market to go down more. Either way, we have no way of knowing what the best option will be at the time, but there are some basic principles we can apply when it comes to the U.S. equity market:
- If there is no clear reason for the market to go down – like the outbreak of a war, a bank going under, or some other geopolitical or financial crises – it is usually better to go ahead and invest. Investing in equities must always have a long-term outlook. We are talking five years plus. If you are investing in an equity instrument like a unit trust, the fund manager will have a very good idea as to which shares still offer value and should outperform over the next five years so you don’t have to consider the quality of the shares, sectors of countries to invest in. If you are investing in an ETF (exchange traded fund) index, your investment will be well diversified and, as we know, the longer-term trend of equities is upwards and this short-term drawdown will not affect the ultimate performance if the market goes down a bit more. If your investment is in direct equities, you have a bit more work to do. If the companies you want to invest in are getting expensive due to a very good run, it might be time to wait till the share offers better value, or to consider those shares which underperformed over the recent past.
- If the drawdown is due to a big geopolitical, financial or natural crisis, it will be better to wait before investing. Market corrections are usually sharp but short. You can expect the market to go down 10% to 20% over one or two weeks. The big mistake you want to avoid is to wait too long before starting your investment. We have seen so many investors waiting for the market to “bottom” before they start investing again. There will never be a bell announcing the end of the drawdown. Your mindset should rather be that the market is now 10% or 20% cheaper than it was, instead of “perhaps it will go down another 5%”.
- Although it seldom helps to phase your money into the market, it is better than waiting too long to start investing. If you are a first-time investor, or just a very risk averse one, investing small amounts of money regularly is a very good way of getting into the market.
- If the investment you want to contribute to has come down but the rand has weakened at the same time, don’t wait for the rand to strengthen before investing. The underlying asset always carries more weight than the currency move.
- If someone tells you that the market is in a bubble and too expensive; that this time it is different and it will not go up again; just think back five years. I am sure there was someone who told you exactly the same thing about the American market. If you had listened to them, you would be 70% poorer in $ terms today. So if there is a depression and the U.S. market goes down 40% from the current levels, you will still have the money you invested five years ago.
It is ironic that it should be more difficult to invest new money when the market has performed very well, than to buy when the market has come down, but that is a story for another day.