Let’s be honest, most of us don’t like to save money. Given the choice, we’d rather consume today rather than save for tomorrow. Even if we feel we should be saving for tomorrow, we focus way more energy on looking for a specific investment or strategy that will earn us a higher return, rather than simply trying to save a bit more.
But let’s say you’ve dug deep and made the commitment to save for a long-term financial goal — a child’s education, maybe your retirement. While that’s an admirable first step, the next one becomes more daunting.
Where and when should I invest?
I’ll talk about where to invest your money in another blog post, but for now I want to focus on the “when” to invest.
The answer should be simple, but like a lot of things in personal finance it’s not really.
Google “when to invest your savings” and you’ll find lots of articles on the where, what, and how, but nothing practical on the when. It’s the same story in the traditional media (newspapers, magazines, and television).
On the other hand, if you ask your stockbroker or friendly barber you might get an earful on the macro economic implications of the crisis du jour, or maybe a recommendation to buy ABC Corp because “it pays a good dividend.” Interesting, perhaps … but not helpful.
The problem is that there is either no information or too many differing opinions. It all ends up becoming noise. And, for many investors the resulting confusion and anxiety can lead to the decision to simply not invest!
A Better Approach
The approach that has been proven to have the highest probability of long-term success is a behavioural one. That is, managing your own behavior is the most important factor for long-term success.
It might sound trite, but the simple answer to the question “When should I invest?” is to invest early and often on a systematic basis.
You can compare many different investing strategies: holding your savings in cash, investing savings at the beginning of a period, investing savings equally on a monthly or quarterly (i.e., systematic) basis.
When you do this, though, it really becomes an exercise in data mining. If you manipulate the time periods, you can make any of these strategies come out on top. The problem is that you’re performing the exercise with the benefit of hindsight. In real life you don’t know which strategy works better until after the fact!
That said, the number crunching does not dispute the fact that a systematic investment approach — consistent, early investing over a long-term horizon — pays off.
There’s just nothing like the power of compounded returns.
Imposed Discipline Pays Off
Think about the difficulty (and the stress) of trying to consistently predict opportune market buying points. That’s the beauty of a systematic approach to investing: the prices on the investments you purchase are spread out over time. In the short term, there will be some good prices and some bad prices. However, your portfolio will average out over the long term. This is referred to as dollar cost averaging.
From a cash flow perspective, most people are better served saving a bit each month rather than trying to come up with annual lump sum like an RRSP contribution. This is really just the pay-yourself-first rule, which is widely touted but woefully underemployed.
A systematic approach can even work for individuals who receive annual cash lump sums, such as a bonus or annual dividends from a private business. You simply take the lump sum, divide by 12, and spread the investments out over the next 12 months. Next year, repeat the process. In the short term, using this approach might not add value from a pure numbers perspective. However, I would argue that it’s the best approach because it’s the most disciplined.
Fear of Regret
There is a behavioural trait known as the fear of regret. People tend to feel sorrow and grief after having made an error in judgment. In investing, errors in judgment can be seen immediately and are easy to quantify. So, from this perspective, what could be worse than investing a lump sum just before a major market downturn? A systematic approach helps mitigate this regret.
Remember investment returns are important, but they are unpredictable. It’s better to focus on the factors we can control, like savings and consistency.
Investing your savings in a systematic way allows you to stay disciplined and increases your chances of long-term investment success.