Recently booming stock markets could have many wondering whether now is the right time to get started on an investment journey. The most widely followed index of US stocks, the S&P 500 index has recently traded at all-time highs and is up more than 50% from 2022 lows. The most popular measure of global stocks, the MSCI World index is up a similar amount.
Such performance makes it very relevant to ask yourself whether you should fear a market plunge or fear missing out? If you're a long-term investor, the answer should be to put your emotions aside, make a plan for how often you want to invest and make sure you build a diversified portfolio. Here's a few reasons why.
Timing the market is impossible
A first principle of investing is that it is impossible for the vast majority of us to time the market, and data shows that individual investors on average are very poor at doing so. Poor timing is a natural result of swings of human emotions - fear and greed - that are triggered by market gyrations. People are usually least invested and holding the most cash when the market is doing worst (fear!) and piling into the market and holding little dry powder in the form of cash when the market is close to or at a major top (greed!). But rather than worry, we can only rely on the fact that over all long historical time frames stock markets have always drifted higher.
Start right now and minimise decision-making
In short, there's two things that'll make sure that "right now" is always the right time to start a long-term investment journey. One is to invest periodically. This will happen automatically, if you are investing from a monthly income stream. And even if you are starting with a large lump sum and you are concerned about putting all of your funds to work in markets at once, you can offset those concerns with a plan to e.g. invest in 10 intervals over 10 months or in any other interval that suits you.
The other way to make it easy to get started investing is to start with a diversified approach, spreading your investments over several assets and, within equities, across sectors, industries and geographies. That can be achieved with just a couple of funds or with a more nuanced approach - but more on that later.
In short, there are at least four benefits of starting an investment journey right now with a diversified portfolio.
1. Having a plan makes it easier to take action
Deciding what to do with your hard-earned savings can seem like a monumental if you don't know what to invest in or even whether now is a good time to get started. But having a plan in hand shortens the time to getting started and moving toward your long-term savings and investment goals and getting the returns that the markets can offer.
Here's our take on how such a plan could look.
2. Diversification reduces risks and smooths returns
A diversified portfolio won’t perform as well as the best performing sectors or industries or certainly single companies in the market – that is unavoidable. On the flip-side, a diversified portfolio of not-too-closely related assets will also reduce the risk of poor outcomes if one asset class or company implodes suddenly. This helps smooth returns as asset classes tend to perform differently in varying economic conditions. The aim is to smooth out the overall volatility of your portfolio.
3. Avoid regret
The chief advantage of putting the timing question aside and build a diversified portfolio over time is the reduction of or even elimination of decision-making, which will help lower regret. On one side, you will build a portfolio that is less vulnerable to market impact and on the other, you also avoid considering when to do what, which means that there's less emotions and as such, less regret, which, in turn, can lead to impulsive decisions.
Remember: doing nothing is also a decision you might very well regret. If you remain in an undiversified selection of a few stocks only or have funds piling up in a low-yielding bank account, you're certain to regret if your investments sour relative to the broader market in the former case and in the latter case, you would regret the missed opportunity if the market continues to soar while your funds languish with no returns.
4. You’ll likely participate in the Next Big Thing
Many times, in many market environments, strong broad market returns are driven especially by particularly strong sectors or industries, like pharma in the 80’s and 90’s, info-tech over the last couple of decades, and AI for the last few years. Your diversified portfolio will have exposure to these key sectors too if you own the broader market.
But what about the risks?
No course of action is without risk and the approach outlined above also has one over-riding risk for those who don’t invest all of their savings all at once from the get-go: the risk that what you want to invest in continues to perform very well before you're fully invested, which would then lead to a higher average price of your investments.
Next steps
Making an action plan:
Create a diversified portfolio in 3 easy steps An even simpler action plan, including some specific funds for inspiration:
Diversify your portfolio with ETFs