Investment professionals are pretty unanimous in their opinion of what it takes to be great at investing.
It is not hot stock tips, perfect timing, earning a high income or knowing more than the next person.
The secret ingredient is consistency.
Being consistent with your investment account contributions, your overarching financial strategy, the advice you choose to accept or not over the long run makes all the difference.
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So, what’s this chatter you’re hearing about “buying investments through the market dip” we’re currently in? Let’s dig in.
Keep contributing to your investment accounts and ensure the money is invested in quality investments rather than sitting in cash
It turns out that investors who consistently invest in quality investments, even during a market downturn, often achieve better returns in the long run, relative to investors who try to time the market (hoping to buy at the lowest point) or those who sell everything; in essence running from the volatility.
A slump in the investment market has investors of all experience levels and age paying closer attention to lower investment prices. When quality investments are selling at a “discount,” this means potentially greater value will be returned to the investor in the long term. The way to take advantage of this market is to consistently purchase these quality investments at lower prices.
Two buying methods that have that secret ingredient: consistency
The first method is called dollar-cost averaging (DCA), and it’s a suitable strategy for just about anyone, especially if you’re new to investing or have limited investment knowledge.
Here’s how it works: you buy into a set of quality investments suited to your risk profile, that are within your investment account — namely an RRSP, TFSA or a nonregistered account. The investments themselves could be an ETF, mutual fund or stocks. Your purchases happen at regular, consistent, automatic intervals, such as every paycheque, and regardless of the price of the investment on the day you’re buying.
Over time, and with many of these purchases, you take advantage of an average price of the investments you’re buying. The average price historically is better than trying to time your purchases on a “down” day in the market — what if you were wrong about which day to buy?
I really like the way popular financial author David Bach explains the concept of consistency through the “latte factor.” Essentially, you trade in your $6 daily latte to afford to make your contributions to your investments every week or biweekly. Over time with your consistent contributions, your latte sacrifices tally up to a sizable retirement nest egg.
The second method is “laddering in,” and it’s a suitable strategy for people who have excess cash waiting to be invested, or those on commission-style pay (less predictable), and often business owners who have up and down cash flow.
With this technique, investors buy less frequently (say every six to eight weeks after they have built up the cash), and typically with slightly larger amounts compared to DCA.
Some laddering investors hope to purchase funds, stocks or bonds on “down” days in the market. However, if they don’t succeed at timing the market, which is extremely hard to do, their regular purchases, though less frequent than the DCA method, also form an average price.
I always suggest to people who want to ladder in that they mark specific days in their calendar when they will make their investment purchases rather than trying to time the best lowest-priced day.
No one knows where the bottom is
Not even professional money managers know the precise timing to buy funds, stocks or bonds at the best discount, which is why we, in the financial education industry, encourage regular, consistent investment purchases rather than taking the risk that you have bought on the “perfect” down day — no one has that crystal ball.
What I do see people doing right now that I think is healthy is working hard to consistently contribute a little bit more toward their investments during this volatile time.
For some, this might mean investing an extra $50 per week and for others this might mean selecting an additional percentage of income to put toward their workplace registered investment plan. Then, keep up with the additional contributions even when the market recovers — tucking away a bit more for retirement is almost always a good thing.
And, if you can’t afford to add more, it’s OK! Just keep making consistent contributions that you can afford toward your investments.
Listen, I totally get the allure of a hot stock tip, but unless you’ve got a fairly sizable portfolio to work with, a huge appetite for risk and ample investment experience (like of the professional kind), it’s super hard to get this right.
The safer approach is to consistently buy investments in regular intervals into a properly diversified portfolio, and as early in your life as possible.
That’s how to “buy through the dip.”
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