The worst possible start to investing — imagine if someone had invested all their money in stocks on January 1st this year. That’s why you need diversification over time.
This is why you need diversification over time
If you had invested all your money on January 1st this year, and tracked the FTSE 100, then right now you would be nursing a 20 per cent loss.
If instead, you had invested all your money in February 2016, then right now you would be quid’s in. Factor in dividends and you would have made a nice profit.
That is why the art of the comedian and the art of an investor is similar, it’s about timing.
But a comedian is at a disadvantage. A comedian can’t hedge their bets, they either get the timing right and make their audience laugh or they don’t and see a wall of blank faces.
An investor has the advantage. An investor, unlike a comedian, doesn’t have to surf the perilous waters of good timing. Instead, they can diversify, over time.
Relevance and irrelevance
Many investors follow my recommenced approach by default. Suppose you invest a percentage of your income every month, put the money into an ISA, and plan to do so for many years. Well, if that is you, good for you. You will lose out when stocks fall, gain when they rise. But because history shows that stocks appear to rise over the long term, providing you do all the other things right, the recent falls should not distract from long-term performance.
Sure, like a comedian on top of their game, you could have gone liquid in January, but getting the timing right is as much about luck as skill and if you get it wrong, the joke will be on you.
The relevant case
But suppose you have a lump sum — a one-off lump sum. It matters not why; you could have cashed in a pension, inherited money, received a very nice bonus, cashed in a share-option in a company you worked for, or even sold your business. Let’s park the reason to one side, and say you have a lump sum and you are unlikely to ever receive such a large amount of money again, or at least for a long time.
If that is you, if you have an aforementioned lump sum, never ever, not on the hair of your chinny chin chin, should you throw the money at stocks all on one day — if you did, that would be called gambling.
If instead you had broken down your lump sum into chunks — say five, chunks, or, depending on how much money you are talking about, into 60 chunks, and invested that money, evenly spaced over say five years, maybe over a slightly shorter timeframe, you would have greatly limited your risk, and at least some of your portfolio would have benefited from upswings.
Time to sell
Related to this is the optimal time to sell. Suppose your portfolio exists for a certain reason — so that one day you can buy a house, or buy an annuity, or you simply want to transfer a portfolio made of growth stocks into one made of income stocks to fund your lifestyle in the future.
Never ever, whether your pate is hairy or not, fix a date for some point in the future when you will sell. You may be unlucky and find this sell date coincides with a time like this.
Either apply a flexible sell date, and create a rule, i.e the first point after a certain date when stocks are at a five year high, or diversify your selling over time — by that I mean, sell in chunks over time.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees