K&H trendmonitor - gazdasági hírek, vélemények

K&H trendmonitor - gazdasági hírek, vélemények

The timing of investments

‘Buy at the right time and sell at the right time’ – as the saying goes. Even junior investors are familiar with this basic concept. In investment jargon, this is called timing. Finding the point where it is cheapest to invest, and buying there; and selling at the highest point. The theory is very simple; however, it is almost impossible to achieve in practice. Yet, how do we find the right timing, and what can we do in the current market environment overshadowed by steeply diving, volatile prices?

What is it that we know for certain?

  • over longer time horizons, markets and share prices rise
  • in the short term (over a period of 1-3 years) there may be periods of increased price volatility and falling markets, as seen in the last month due to market fears caused by the coronavirus epidemic, or during the 2008 financial crisis
  • in a larger perspective, however, the significance of these periods is reduced
  • the upward trend offsets the low points

In hindsight, the 2008-2009 crisis period appears to be just a ‘small’ hiccup:

source: K&H Fund Management
Price evolution of K&H Balanced Fund 3 in the January 1, 2005 to January 1, 2020 period

Let’s switch off our emotions!

In view of the above, it would be best to invest and keep our available savings in riskier assets, over a longer time horizon, without the need to worry about fluctuations. However, our fears can easily override this plan. How can we still switch off our emotions?

Let’s invest regularly!

Let’s invest a fixed amount every month or at fixed regular intervals, regardless of the prevailing state of the markets. Our regular, fixed-value investments represent lower risk-taking individually; and by investing at different points in time, we can avoid investing all our money at the peak, or not investing at ‘discounted’ rates, when prices are falling sharply, because our fears prohibit us from doing so. To illustrate this, the chart below shows the price evolution of K&H Balanced Fund 3, where the orange dots mark the regular, monthly entry points:

source: K&H Fund Management

Thus, the benefits of regular investments are as follows:

  • We can reduce our market entry risk and also give ourselves a chance to earn a yield in a volatile or falling market environment, not unlike the one we are faced with today, as:
    • we spread our entry point across several points in time,
    • with this, we effectively smooth out market fluctuations, and
    • we invest at low ‘buy’ points even when we wouldn’t do otherwise;
  • a convenient solution: we only need to submit our order once, and from there on it is automatically executed,
  • as we can submit regular orders for multiple investment funds at the same time, we can actually start building a portfolio with a small sum.

Plus 1 benefit

  • Let’s not forget that with regular investments our wealth continues to grow month by month, as ‘many a little makes a mickle’.
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