A few weeks ago, I talked about the power of compounding. This week I want to tell you a story that highlights another benefit of regular contributions into your portfolio.
We often will ask our clients if they have any cash sitting on the sidelines that they would want to invest. Often, especially in today’s market, we get the response “I think the market is too high and I want to wait for a pullback”.
Those who know us will understand that we’re against this type of thinking. We strongly believe that time in the market is more important than timing the market.
Nonetheless, some clients will hold off on investing that cash.
Fast forward to a couple weeks ago.
The S&P 500 was down 3.62% from its high and the TSX was down 3.33%.
We got a number of calls asking us to invest some of the cash our clients were holding outside their investment accounts. Some of those clients were the same ones telling me to wait the last time.
The crazy thing is, I looked back at the S&P 500 and the TSX prices from the last time we spoke and they were 12.21% and 10.63% higher, respectively, today than 3 months ago.
In fact, they were both cheaper just two months ago.
If you’ve ever tried to run a survey, you might understand that the way you frame a question can have a massive impact on the answers you get.
This is as true for investing as it is for anything else.
Let’s look at these two questions:
1. The market is down 3.62% from it’s high. Is it a good time to invest?
2. The market is up 12.21% in the last 3 months. Is it a good time to invest?
Most people would respond yes to question “A” and no to question “B”.
But we’re talking about the same market on the same day.
Framing bias can be costly. If you miss out on returns because you were “waiting for the right time”, it’s hard to make them back.
One of the simplest ways to address this bias is by regularly contributing to your portfolio.
If you’re adding every month, you won’t be questioning whether it’s the right time to buy. This smooths out your entry points and allows you to benefit from the peaks and valleys.
More on that another time.