Are you still waiting to invest? Read this!
Are you still waiting to invest? Read this!
What price, indecision?
Greed and fear are two commonly acknowledged emotions associated with stock markets, and are often cited as factors behind unpredictability and volatility in investment behaviour.
But while greed and fear may have their place in the overall investment scheme, there is also another emotion that may stand in the way of investors making good investment choices, and that is: Indecision.
Indecision can be a crippling adversary, as missed investment opportunities can have enormous consequences on your financial health down the line. Indecision can strike investors anytime, be it when stocks are going down (fear) or while stocks are going up (greed).
The opportunity cost of holding on to your money
For investors, the market can get intimidating when volatility comes to the forefront, as it is often associated with risks. When investors contemplate only the possible risks, it makes it difficult to anticipate possible returns with certainty.
Volatility – which measures the degree of change in the price of an asset over a period of time – is not uncommon for investments like stocks, which can experience wide price swings over a very short period of time. But volatility creates fear and uncertainty, which can lead to bad investment decisions.
Investors may resort to inaction and choose to leave their money in a deposit account as this is seen as the safest alternative to wait out the volatility until the ‘right’ time to invest comes by.
This is often referred to as the opportunity cost of holding money.
Source: OCBC Wealth Management
Not making a choice is a choice in itself but this type of indecisiveness takes the form of missed opportunities.
Leaving cash in a deposit account may feel comforting in volatile times, but you are not giving your money a chance to grow at a much more attractive rate, and that is the opportunity cost that you have to bear. Investors tend to forget that volatility can also be an opportunity.
So, how does an investor counter indecisiveness?
When it comes to investments, the goal has always been to buy low and sell high. But can we faithfully execute such a strategy with success each time we invest?
Markets can be fluid and volatile. In the first week of October 2021, US markets were hard hit as technology stocks tanked and bond yields rose. Yet by the end of the week, markets were back in the green, recouping whatever losses they had suffered earlier despite weak payrolls data.
It is this very nature that makes it impossible to accurately and consistently determine when markets have hit their lowest or highest points.
Hence, it is not possible to buy low and sell high every single time as it is difficult to time the market.
The “perfect” time to enter investment markets probably doesn’t exist. In fact, time spent invested in the market is a bigger determinant of investment success than market timing. So long as the macro-outlook is sanguine, you should not get distracted by changing news headlines or market noise and freeze.
There are however some strategies that investors can use to help make investment decisions and ease the pain of market volatility.
Invest small amounts over time
Investors can start small by adopting a dollar cost averaging strategy, where a fixed but more manageable amount of money is placed into a particular investment at regular intervals (e.g. monthly).
The key advantage of dollar cost averaging is that it reduces the effects of market timing. Investors also need not fear the risk of making counter-productive decisions out of greed or fear, such as buying more when prices are rising or panic-selling when prices decline. Instead, this strategy forces investors to remain invested in the markets despite any background noise that may be going on.
Dollar cost averaging offers an affordable, sustainable and comfortable way for new investors to ease into the stock market without incurring the anxiety that comes from having too much invested in a short period of time. It is thus the more practical choice among new investors, and investors who may not have the time to actively monitor the performance of the stock market.
Investing early and regularly, no matter how small, can deliver good returns over the long term.
For unit trusts, this can even take the form of reinvesting dividends over time.
Source: Bloomberg, data from end July 2011 to end July 2021. Deposit returns abased on Bank Saving Deposits Rate from the Monetary Authority of Singapore. BFG ESG Multi Asset equities total return based on the BlackRock ESG - Multi Asset Fund with net dividends reinvested.
You can start a regular savings plan with just a monthly commitment of S$100 and enjoy the flexibility of adjusting this recurring investment at your will.
Sometimes, it’s even easier if a robot does it for you
Robo-advisors are digital platforms that utilise automated solutions and algorithms to help invest and manage money for you. They offer a disciplined approach to investing that runs on autopilot as opposed to actively-managed unit trusts that tend to depend on the decisions of a fund manager in the context of the fund’s investment mandate.
Timing of investments and portfolio rebalancing are done in specific intervals and/or follow specific programmed rules, hence removing human biases in the process. But of course, the algorithms and the investment methodology are monitored by a team of professionals and may be tweaked from time to time to deliver optimal performance.
The ingredients for portfolio construction are typically ETFs, ensuring that investors are not taking concentrated exposure in any specific security. That being said, OCBCRoboInvest carries a number of portfolios that are constructed using single equities as key building blocks.
Robo-advisors tend to be low-cost, passively-managed, diversified and convenient. They offer a rules-based type investment process that is relevant to individuals who would benefit from a strictly hands-off approach due to the salience of behavioural biases in their investment decisions.
When seen across a spectrum, robo-advisors lie comfortably between investing in an actively-managed unit trust and passively tracking a market benchmark via an ETF.
Plus, they offer the option of dollar cost averaging.
*Data as of 1 September 2018
**Data as of 27 April 2020
***Data as of 17 August 2020
Source: WeInvest, data as of 31 October 2021
Needless to say, the best way to counter indecision is to stop striving for perfection; the greatest decisions are made when you don’t overthink… leave it to the robots!
About OCBC RoboInvest
OCBC RoboInvest is an all-in-one digital platform that helps you invest easily at your own convenience. Smart portfolio rebalancing updates also mean you can save time on performance tracking and get alerted on rebalancing opportunities as the market changes, which is especially useful in navigating rocky markets.
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