If you think the pothole ridden roads of the South Hams are bumpy, then take a look at the global financial markets!

The traditional [and proven] approach to holding equities is over the complete economic cycle, long-term, and with an eye on underlying growth and/or consistent dividend yield. But this value focus has been somewhat usurped by sentiment driven investor behaviour and the quest for instant gratification – perhaps it’s the smart-phone effect. These factors serve to emphasis the spikes as confidence rocks and rolls, and it can leave investors with a timing issue when it comes to contribution… you may buy at a ‘good price’ on a down day or pay a premium on a day of market confidence.

Over the shorter-term this volatility can be reduced by phasing lump-sum investment, known as ‘Pound Cost Averaging’. In this scenario, breaking up the sum into a series of investments over a wider timeframe will ‘smooth’ the journey, as monies will be invested across the wandering values of the given market(s). Furthermore, a plan such as this encourages ongoing saving behaviour and regular saving is a rewarding dynamic; the sooner your financial planning journey begins the better c.p..

Note, studies by Vanguard of the UK and global markets have indicated that “the less time invested the less potential to maximise returns” and therefore that if lump-sum investment is possible, it is likely to be preferred to ‘Pound Cost Averaging’, despite the additional exposure to volatility. The study indicated that across a range of traditional asset weightings, 75 times out of 100 the lump-sum investment will out perform. Risk and reward in action.

The table below illustrates how volatility on the S&P500 is reduced over time and how those with the ‘stomach for it’ benefit from earlier investment and less frequent checking of their respective portfolio(s).

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You’ll note that on a daily basis, there’s almost a 50%chance that your new investments will have reduced in value, ouch, whereas after 5-years – the advised minimum holding period for equity investments– the chance of your portfolio reducing in value is close to 1 in 10. This trend continues until it is close to zero after a 20-year holding period.

Studies of ‘behavioural finance’ also reveal that “loss aversion” is a key investor principle and that individuals regret losses twice as much as they appreciate gains… if you’re checking daily this is likely to mean as many bad days as good days. Whereas by allowing investments to run their course the impact of “loss aversion” is reduced and investors tend to stick to their saving and investment plan. Patience and discipline is where true value/reward is witnessed.

There is no right or wrong here and finding a solution that meets an individual’s aims whilst mitigating their key concerns is the focus of a financial planner.

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