It’s not often that I have reason to quote retail magnate Gerry Harvey but his recent attempt to time the share market is an investment lesson I needed to share.
The Harvey Norman founder and avid tennis player told The Sydney Morning Herald that he recently spent $1 million each on 15 different stocks, a total of $15 million, following the week-long March market rout, hoping to catch the bottom of the market and secure a good yield.
Turns out, Gerry missed the mark. And while Australia’s 40th richest person won’t be on struggle street, he’s still worth around $1.9 billion, he did get this one wrong for the simple reason that it’s hard to time the bottoming-out of the market.
As Scott Pape wrote, the recent down-turn has meant the ASX has been on sale, and like any good sale, we should seek to make the most of it.
But, at the same time, we shouldn’t get distracted from our long-term financial goals. There’s a fine line for most investors between leveraging an opportunity and going all-in to time a market crash – something that even rich-listers like Gerry Harvey struggled to do.
It’s how investors can get lured away from their financial goals and become tangled in the slippery slope of market timing, which works against having a clear, realistic and sensible long-term investment strategy.
By contrast, when you dollar-cost average, you invest equal dollar amounts in the market at regular intervals of time. It’s a similar principle to our approach with our latest investment bond 10Invest which enables regular contributions to different investment options in our fund.
The value of an investment bond rises or falls with the performance of the underlying investment options that have been selected, and earnings are reinvested to further benefit from compounding interest.
For investment bond investors, it’s the monthly contributions that really can make a marked difference. Because buying at regular time intervals reduces the impact of volatility by spreading out your purchases so you avoid buying a huge parcel of shares at a peak price.
While a down-turn is a good time to buy, it doesn’t mean junk your longer-term strategy all together. Instead, it might mean investors use this period of volatility to increase regular contributions to their current fund.
Rather than trying to time the market, this approach sees investors buy – or contribute - consistently over time at a set period, at a range of different price points. It also offers benefits in volatile or hard-to-predict markets where investing a lump sum can be rather nerve wracking and very risky.
Our latest investment bond, 10Invest, is designed to be held for at least 10 years. Importantly, this means that while day-to-day market fluctuations can’t be ignored, what ultimately matters, is the long-term direction of the market and investors’ ability to make regular contributions for compounding growth.
Whether it’s putting money away for a home deposit, saving to start a small business down the road, or planning for retirement – it’s regular contributions that help you ride out risk and capitalise on times like this. They also keep your eye on the prize and help you stay focused on the long game.