All of sudden, people have started talking about shares again! They are generally wanting to start to invest and shares are back in fashion!
I find it really strange that the same people, who normally only want to shop for clothes during the Boxing Day sales and are ordering a lot of things online, for some reason always want to invest when companies are looking to sell at full price and sometimes even have a premium price tag on them.
Why is this the case?
Hopefully those of you who have been through an Investor Education session with us know that this is a classic case on the investor psychology curve.
People always want to buy when investments are ‘back in fashion’ and not when they are out. The problem with this is that you are buying high and selling low.
All this being said, I actually think this rally could keep on going due to the herd mentality we are familiar with, but I would be a lot more comfortable investing at these prices if I knew that for the last two years I had been regularly investing each month into the same investments at a lot cheaper prices and I am now sitting on going gains. I wouldn’t want to be in the position of having a large cash balance now and seeing my interest payments being nearly halved and wondering if I should invest because of fear of missing out.
Which situation are you in?
Mr Kelly’s Classroom – what is dollar cost averaging?
This is simply regularly investing over set time periods into the same investment.
Why would one do this? Easy, it reduces the effect of market timing and volatility.
If you believe an investment will be good over the long run, but are feeling unsure about it in the short term, it takes some of the risk away because if the price drops for awhile you will be buying more of this investment at a cheaper price reducing your average total cost. This is by far the greatest strategy for young professionals trying to build an investment portfolio. Clients who have done this over the last few years are now really reaping the benefits.
What I have learnt from you
Recently, a client in one of their coaching sessions brought up that they were concerned about how their investment was performing.
We were a bit surprised as we knew the investment had performed strongly. The problem was that they were looking at a statement which came out over 4 months earlier. We looked at a more recent statement and it showed over 20% more. Obviously the client was now over the moon with the investment!
This was a great lesson for both the client and us as it reminded us that although it is important to look at your investment statements, don’t get too caught up in short term performance because there will always be volatility and some reporting periods you might see poor returns while others you will see amazing returns.
The important thing is to remember how long you are investing for, what you are trying to achieve from the investment over that period, and if you still have confidence in this investment to achieve that over the long term.
Disclaimer: Information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.