Should I Invest Now?....or Later? (or Both?)
As investors, even when we have designed an appropriate target mix of equities and bonds for our portfolio, we are faced with the challenge of when to invest. Should you invest only when the market is low? Only when it is high? Or all the time?
Of course, the market always seems to have a hand to play in the decision. Bear markets can give investors reason to pause on investing, while bull markets are exciting and often cause people to want in on the action. So, which is correct? And in what scenario will your decisions yield the best returns?
Investment Decisions Arise as Cash Becomes Available
As cash becomes available for investment outside of or within your portfolio, you (or your advisor) have to decide when to pull that trigger.
Generally, cash becomes available through three basic scenarios:
For the purpose of this discussion, we will assume you are working towards a diversified portfolio of equities and bonds, with the target percentages being suitable for your particular risk propensity. So, this is now less to do with what you are investing in and more about the when.
It might seem odd for Halpern Financial to share thoughts on the ‘when’ since we are vehemently against market timing. However, we are also practical investors with decades of experience, who know that neither we nor our clients are robots. We all bring human elements to the table around our investment experience.
Compound Interest Wins
Of course, there are any number of articles which present mathematical solutions for when you should invest cash into a diversified portfolio. These will tell you, with extreme mathematical accuracy, whether you will accumulate more funds over the long term based on a variety of ‘when to invest’ strategies.
This means that mathematically, it’s not difficult to work out when you ‘should’ invest for maximum long-term returns. Spoiler alert: In almost all scenarios, the sooner you get your money out of cash and get it working harder for you in an investment portfolio, the better. The magic of compound interest wins!
However, since we are not simply mathematicians – we are humans with feelings, reactions and a tolerance to volatility, risk and losses – it is not always practical to simply invest as soon as cash is available. With that in mind, here are a few strategies to consider:
1. Lump sum.
Perhaps unsurprisingly, coming into a significant amount of cash can cause investors the most anguish, and can even be the most paralyzing in terms of when to invest. You could….
a) Go for it! Invest everything at once into your target diversified portfolio. This one can be tough to do emotionally, especially when markets are volatile. If you have a steely nerve and can tolerate implementing this strategy, consider setting yourself rules to avoid the possible onset of panic if values take a dip right after you invest. Maybe avoid watching too closely in the beginning or set limits for yourself about how often you can ‘take action’ within your portfolio in response to short-term volatility (other than scheduled rebalancing).
It may also help to remind yourself of the studies completed which show that even ‘unlucky’ investors who historically invested right before a crash, come out just fine after a long-investment time horizon as long as they are prepared to ride out the stock market’s long-term trend upwards.
b) Pace in over time. This strategy is commonly known as Dollar Cost Averaging. This could involve investing a specific dollar amount or share quantity periodically, an amount based on time, market conditions, economic indicators etc. There are many different strategies to space out your investments based on a disciplined process, which can be much more tolerable than going ‘all in’ at once. Math will only be able to tell you which would have resulted in better returns by looking backwards – which most people don’t do! This strategy holds great appeal.
c) Pace in on dips. In theory this may sound great. However, this is a really hard strategy to implement successfully in practice. Investing ‘on value’ is absolutely prudent – rebalancing to specific asset classes and sectors which are available ‘on sale’ relative to historical norms, or relative to other asset classes. However, buying from cash into markets on a dip is much harder. Waiting for a dip can take a very long time, causing you to languish in cash on the sidelines for far longer than is prudent. It can also be emotionally difficult to invest when markets are dropping.
2. Periodic excess cash.
Any of the 3 strategies detailed above for ‘lump sums’ can also be considered here. When cash is coming into your investment portfolio periodically, it does make the idea of investing right away with each deposit more appealing. Subsequent volatility is likely much more tolerable than with a lump sum, since the amounts are smaller relative to your total portfolio. You also always know that more cash is coming into your account shortly, which helps view market dips as an opportunity to ‘buy on sale’.
If in doubt, consider the following: for a significant number of investors, their 401k is their largest, and most successful investment. That’s because:
a) Automatic savings. Money goes straight into the account, and in almost all circumstances is invested immediately. The contribution starts working for you right away regardless of market conditions (or your feelings towards them).
b) You generally can’t withdraw the funds until a certain age or until certain conditions are met.
c) Most 401k investors limit market timing and instead allow their portfolio to ride out market gyrations.
3. When you sell existing investments.
If the cash in your portfolio comes from selling an existing position, consider why you sold the old investment in the first place. In many cases, it’s likely you have your eye on a preferred holding. But hiding in cash and waiting to time markets until things feel more settled is not prudent.
The same strategy applies when you complete a rollover from an inactive employer-sponsored retirement plan like a 401k to an IRA. These rollovers are most often completed by liquidating the current plan holdings and depositing cash into the new or existing IRA. Since your former employer-sponsored plan was probably “fully invested,” getting back into an investment portfolio right away probably makes the most sense here.
Make a Plan You Can Tolerate and Stick to It
From our experience, we know that the minute details of getting your cash invested are far less likely to impact your long-term investment success than (1) having a plan you can tolerate (from a risk perspective) and (2) implementing the plan in a disciplined manner.
The great news for you is that, as a client of Halpern Financial, we take all factors into consideration when determining when your funds should be invested, rebalanced, and adjusted. These determinations are made based on everything we know about YOU as an investor, but also what we learn from sophisticated research, technology, and discipline to design an investment plan that works with your comfort level. So you don’t have to worry each time the market swings in one direction or another. We have you covered.
Director of Portfolio Management