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A time-honoured investment strategy – perhaps more relevant today than ever.
by Peter Hargreaves

22 Apr 2020

 

I think in order to consider the most appropriate investment strategy it is first important to characterise the world we find ourselves in.

As far as surmising the duration and severity of this pandemic, a fairground fortune teller is probably as good as the myriad posed daily hypotheses. Many economies are basing their strategy on a view that freedom of choice would swamp health establishments and their personnel. Leaving behavioural strategy to the individual could be beneficial to the economy but would likely result in accelerating the death rate. 

The peculiarity of the situation in which we find ourselves is the see-sawing nature of the problem. By this I mean that there does not appear to be any single event which will drive markets higher or lower, from which point we can call a recovery or a sell-off. As the news evolves, there will be days where markets recover markedly, and others where it takes a drastic tumble with resulting volatility.

The task for governments around the world is tricky. Blinking too early with a loosening of restrictions could see a subsequent re-escalation of infections and then a restoration of restrictions. This would stack further volatility onto already volatile markets.

The U.K. has a policy of banning some activities and advising restraint in social contact. This will damage the economy and recovery will take considerable time - indeed many businesses will never recover. Government proposals to underwrite salaries and prop up many agencies will massively increase our already colossal national debt.

So how to invest under these volatile circumstances – is there are a viable strategy?

The answer is quite simple - use this volatility to your advantage by investing little and often. An investment today may well have fallen in value a month from now, but when you invest again at that point, you will be buying in at a cheaper price. Alternatively, if the market goes up over the month, at least you have been invested rather than waiting to see what happens.

The effect of investing regularly is called “pound cost averaging”. It is a commonly used strategy to reduce risk for investors and is especially relevant in these uncertain times. The important thing for investors is to make sure they are in the market to benefit from any rallies, but also to protect themselves in downturns. Investing regularly goes someway to achieving both these things.

Very few investors are immune from the disappointment of a falling market. But with this strategy you almost welcome a short-term decline as it provides an opportunity to continue your regular investment at more attractive prices.

My advice for those wishing to invest is always the same – don’t dawdle. When you are ready, get started with small sums invested on a regular basis.

 

Please note that the information provided in this article is not to be construed as advice and any views expressed on holdings do not constitute investment recommendations and must not be viewed as such. If you are unsure as to the suitability of an investment for your circumstances, please seek independent financial and tax advice. Investments can go down in value as well as up so you may get back less than you invested. Your capital is at risk.