We have talked several times about the right time to invest and about trying to invest when the price has bottomed out. We have also talked about a time-tested and affordable strategy, which is to reduce the average price by making trades periodically.
Let’s try to look at cases where a single amount is invested and what can happen when the investment is made at the wrong time, for example at the top of a market index.
The illustration shows that from the peak in 2000 to 2014, the market price of the index has remained unchanged. If you had invested in the index in 2000, you would not have earned any capital for 14 years. It is worth noting that during this period the stocks in the index paid dividends, whereas the example is only about the return on capital.
By contrast, if the investor had adapted to market changes and managed his investment portfolio dynamically, he would also have earned from a fall in the market or a reduction in the average price.
If you are a very long-term investor and are saving for retirement, your goal is in the long term and dynamic investment management will probably not be very relevant, because in the long term, investments in securities provide positive returns.
Why? It’s all proven by statistical calculations based on historical data. Also, the Internet is full of stories of individuals who have invested a few hundred dollars in one company or another and have become millionaires in old age. Although the purchasing power of a few hundred dollars 80 years ago was twenty times greater, the capital gains over such a long period are still incredible.
As you can see from the illustration, the shorter the investment period, the greater the amplitude of fluctuations. As the time horizon increases, the return-risk ratio statistically improves and the risk of losing capital is gradually minimised.
Of course, not all investors will want to follow such a strategy and there will be people who are willing to take more risks. It is precisely this type of investor who will tend to chase the bottom and actively enter and exit positions.
Investment services are provided by Fundvest UAB (private limited liability company established in Lithuania, registration code 305667997, registered address Gedimino av. 20, Vilnius Lithuania). Fundvest UAB is licenced and supervised by the Bank of Lithuania as a financial brokerage firm (category B). More information is available on the website of the Bank of Lithuania.
Nothing on this website can be considered as an offer or advice to purchase or sell any security in any jurisdiction. Fundvest does not provide tax, accounting, or legal advice to its clients, and all investors are advised to consult with professional advisors regarding any potential investment.
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