Buying Into a Bull Market
During a large market downturn, it is often difficult to convince investors to put their money into the equity markets as they hear bad news daily about these investments and it appears that no end is in sight. This is however the ideal time to do so and those investors willing to buy at or near these lows are greatly rewarded as the markets recover. So on the flipside; is it a bad idea to invest when the markets are setting new all time high records? I guess it depends on how high you expect the markets to go and what you decide to invest in.
With recent and repeated record highs in the US markets, many are wondering what they should be doing right now with new investable assets. We have technically been in a bear market for 5 years now and the growth has been substantial. So how do you invest in the markets when they’re already so high? Have you missed the boat or is there still time to jump in?
There are some people out there who think the equity markets can’t sustain these new highs and are advocating investing in bonds instead of equities. Unfortunately, the low yields bonds are producing will mean considerably less income in retirement. In 2001, an investor in long-term Canadian bonds needed $900,000 in assets to generate $50,000 of income. Today, you would need $2.1M to reach this same income goal. Although a 100% bond portfolio may make you feel safe, in truth it’s anything but.
Investing fully into a 100% equity mandate could work for some people but the vast majority of Canadians are not ready, willing or in the position to take on this much risk. If the stock markets do continue higher, the rewards of this strategy would be great. However, the risk is simply too high for most and this approach is generally not recommended.
The right answer for many is to invest in a truly balanced portfolio. There are thousands of investment funds out there that claim to be balanced and a vast majority of them are not really all that balanced. A good investment advisor can go a long way in helping to sort through the offerings and find the ones right for you. A proper balanced mandate is one that is run by active fund managers who are looking beyond traditional income products to generate income, manage risk and beat inflation.
The next step to consider when investing during market upswings is to consider a dollar cost averaging strategy. Instead of investing the full amount all at once, you set up a plan to invest equal amounts over a period of time. For example, if you have $25,000 to invest, you can structure the deposits to invest $5,000 per month over the next 5 months. This strategy will allow you to average out the price of the units that you’re purchasing. The best method of dollar cost averaging for many situations is to have a monthly automatic deposit set up year round. You decide how much you want to invest over the year and then have it automatically deducted from your bank account each week, bi-weekly or month.
Timing the market is a very difficult thing and many that try to do so end up failing miserably. At the end of the day, time in the market will reward you far more than attempting to call the top or bottom. So don’t be afraid to jump in and take advantage of the bull market we’re currently enjoying, just make sure that you have a properly structured plan for how to get in.
Please note: This article is not meant as specific investment advice as each person’s situation is unique. Make sure to discuss your situation with a trusted advisor and develop an investment plan that’s right for you.