THE BIGGER PICTURE
In March 1933, at what turned out to be the peak of the Great Depression, President Franklin Roosevelt gave the famous rallying cry to America that "the only thing we have to fear is fear itself". Today fear has again gripped investors, and we have witnessed viciously volatile panic-selling, as traders and algorithms ply their trade to make a profit. As in 2008, when many feared that the financial system would collapse, today investors are fleeing risk assets and seeking safety in money market funds, government bonds and cash deposits.
Unlike speculators, who look for short term profit, as investors we should be pleased when what we wish to own can be bought more cheaply. If we have taken appropriate steps to ensure that we have sufficient liquidity to weather a storm, then if we are able to invest the same amount on a regular disciplined basis, we will buy more shares when prices fall and buy fewer when they rise, while watching our net asset value rise.
The markets at this time are a treacherous place, however, dollar cost averaging into the market with discipline will reap rewards, provided that the investor invests into a broad index which itself is part of a well-thought-out and diversified strategy.
It makes no sense from an investment standpoint to hide in a money market fund or cash deposit. Money market funds have their place in any investor's portfolio, but not if you are a saver or are funding retirement at a time when practically everything is on sale. Deciding where and how to allocate capital and what to buy is another matter.
Some people may even be considering suspending retirement contributions until the situation improves. Making retirement contributions will always be sweeter when prices are rising, but you will be getting more for your money when they are falling. The money you put into the market when prices are declining sharply will be the best purchases you ever make, especially if you are relatively young.
You may be reading this in the midst of making some hard choices regarding family finances and business, with immediate survival as your priority. However, if you are able to invest, then do not become a victim of volatility. Until after the event, no one knows where the bottom of any market is, or knows anyone else who does. If you think you do know, you will fail! The beauty of dollar cost averaging is that you don't need a market bottom to succeed: Rather than becoming a victim of volatility, you can make it work for you. Savers should hope that the market goes lower, so they can cash in during sales.
Two things need to happen for the economic and financial situation to improve: containment of the spread of the pandemic and the restoration of the supply side of the economy. No one can forecast when this will happen. In the meantime, however, if you believe there will still be a capital market next year and the year after that, then dollar cost averaging will bring rewards.
The author is a member of the Society of Trustees and Estate Practitioners and an investment counsellor. The comments by the author are a reflection of his opinion and do not constitute an offer to buy and hold securities.