With shares rising strongly, is it best to lump it all in or drip it in slowly?
As we all know only too painfully, the banking crisis and subsequent recession caused investors to flee the stock market in droves, driving the index of the UK's 100 biggest companies, the FTSE 100, down as low as 3,500 in March this year -- a level that, 18 months ago, most of us would have found unbelievable. Many invested the money they took from the market in shiny things instead, helping to push the price of gold to the $1,000 an ounce mark.
The FTSE has since rebounded, and the press has made much of its breaking the "psychologically important" 5,000 level (which is nonsense really, and is simply a reflection of our having 10 fingers rather than signifying anything important -- if we were binary creatures, like computers, they'd no doubt be waiting with baited breath to announce that the "psychologically important" 5,120 resistance level had been broken).
But even at 5,000, the FTSE-100 today is still a long way short of the its record high of a shade under 7,000 at the peak of the dot com bubble. And the economy is not out of the recessionary woods yet, with people still arguing about what shape the it will turn out to be and whether there's going to be a double-dip (possibly exacerbated by the world's banking system, which really hasn't yet rectified its fundamental structural problems).
Back into shares?
So, if you're now thinking of selling the glittery stuff (or extracting the readies from under the mattress, or wherever your stash is) and putting your cash back into shares, should you invest it all in a lump sum to take full advantage of any new bull market that we may have entered, or should you drip feed it in small amounts to minimise the risk of any new downturn losing you a packet? Depending on how the market turns out, it could make quite a difference.
If you had been investing some money for, say, a year, at any time during the last bull run, you'd almost certainly have been better off with a lump sum at the beginning of the year -- various figures suggest that if you'd invested your lump sum into a FTSE 100 index tracker at the start of, say, 2004, or 2005, you'd have ended the year better off than if you'd drip-fed monthly instalments instead.
But look at the 12 months just gone and you'll see a completely different picture. Had you put your cash down in a lump sum investment exactly a year ago, when the FTSE hadn't quite dropped below the 5,000 level yet (but was shortly about to), you'd still be sitting on a slight loss today, with the index not yet having regained its level of mid-September 2008.
But if, instead, you'd drip-fed money into your tracker monthly, you'd be laughing today. You'd have bought more shares in months when the market was down, and eleven out of your twelve monthly instalments would now be in profit -- some, like your March 2009 instalment, which you'd have bought when the FTSE was barely above 3,500, handsomely so. In fact, only one of your investment instalments, your initial one a year ago, would be in the red.
How do you do it?
So, knowing the difference your strategy can make depending one how the market moves in the next year, how do you get your timing right? The simply answer is you can't. One approach suggests that, since, historically, there have been far more years in which the markets have risen than fallen, you should favour a strategy that works best in the bull years, and so get your lump sums invested as soon as possible -- but that might not help your peace of mind if you plonk it all down now and next year turns out to be a stinker.
I'd personally recommend a two-pronged strategy that ignores the short-term movements of the market altogether. Prong one is to make regular monthly investments from your salary into an index tracker, stashing it away and forgetting about it, and hoovering up lots of cheap shares during market dips.
The second prong is for lump sums, and I'd go for individual shares, paying no attention to the overall market whatsoever. If I think a share is currently a bargain, because the price is significantly lower than I think it should be in comparison to the company's actual business performance (which has got nothing to do with the wiggly lines on the FTSE charts), then it goes on my list of potential purchases. Then whenever I have a lump sum, if there are cheap shares on my list, I'll buy some. And if not, I'll sit on the cash.
And in ten or fifteen years' time, the up years and the down years will have evened things our much more beneficially than any attempts at market timing on my part would have done.
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