All of us who invest in shares want to time our purchases to give ourselves the best chance of good returns. But it’s a lot harder than it might seem.
No one, no matter how confident or skilled they may seem, can predict how the market will do in the future or how well an individual company or fund will perform. There’s no harm in reading the opinions of investment managers and economic experts, but bear in mind that these are opinions only.
Trying to time the market to your advantage, by buying at the bottom and selling at the top, is almost impossible.
But it is possible to reduce the risk of investing all your money at the top of the market. The way to do this is to gradually invest over a reasonable period. Rather than invest all on one day, gradually invest some each month – over, say, twelve or eighteen months.
Although this may mitigate the risk of buying at the top, it doesn’t remove it altogether as the market may fall immediately after you have invested your final tranche.
When should you consider equity investment?
You should consider equity investment for any long-term investment objective.
For example, for someone in their 40s or younger planning to use their savings at state pension age, then this is a sufficiently long period to consider investing in equities.
Another example is when someone is planning to take income withdrawals from their pension at retirement with the aim of making those withdrawals last a lifetime. As remaining lifespan is likely to be 25-40 years, this is sufficiently long to consider equity investment. In this example, because withdrawals of money from savings starts almost immediately, it also makes sense to keep some savings in cash. This is because drawing income from investments that are falling in value can cause irreparable damage to your investments.
Other factors to consider are:
Your attitude to investment risk. If taking investment risk leaves you feeling uncomfortable, then maybe safer options area better choice for you. For example, when choosing between an annuity and drawing income from an investment fund, it’s only possible to get a better income from the income withdrawal option by taking investment risk. If you are not prepared to take investment risk, an annuity is likely to provide a better lifetime income (but less flexibility) than an income withdrawal fund invested in low risk and no risk investments.
Your capacity for loss. This is different to your attitude to risk and means how much you can afford to lose. For example, you may be willing to take high investment risks but if those risks don’t pay off, you might not have enough income left to pay for fixed monthly bills like food and utilities. In this situation, it is better not to take the risk of investing in higher risk investments in the first place.
When you should avoid equity investments
Equity investments are best avoided over shorter periods. Historically, the chance of equities outperforming cash increases if you hold them for a longer period. You can read more about this in our article Shares: why you need to think long term.
If your goal arises within the next five years, cash is probably the best solution – even if returns are very low at the moment, as the risk to your capital is low. Examples of this sort of goal might be funding a child’s higher education costs, where they are due to go to university within the next two or three years.
If equity investments are outside your risk tolerance or your capacity for loss, they are also best avoided. Instead, you might consider more predictable solutions such an annuity rather than income drawdown. Doing this would mean you needn’t lose sleep over market falls, or run the risk of not being able to pay your bills.
If you do decide that your risk tolerance and capacity for loss mean that equity investments are suitable for you, it’s still wise to proceed with caution. Diversifying your investments and holding some rainy day savings as cash gives you more options when markets are turbulent.
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