Financial markets are rocketing – are you ‘phased’? 10 August 2015
Since the global economic crisis of 2008, global financial markets have rocketed due to unprecedented low inflation, relaxed monetary policy and financial stimulus measures.
If your portfolio has been invested for some years, this is wonderful. But what if you have money to invest now? You’re missing out on the runaway growth, but the financial markets are too expensive.
Buy or wait – what should you do?
Fortunately there is a prudent option called phasing-in which changes your financial markets entry point from a single day to multiple months. You invest your funds in a money market strategy and instruct an asset manager to gradually switch these funds into your selected investment strategy over a predetermined period.
Phasing-in costs the same as investing all on a single day. The only possible cost is an opportunity cost.
In falling financial markets, phasing-in benefits you outright. In rising financial markets there will be an opportunity cost, but that cost will still be less than the cost of not investing or placing the entire sum at once only to see the market fall.
Let’s take a look at examples from 2005 and 2008 and compare single-point-in-time investment to phased investment in selected financial markets over the same time period.
In 2005 you would have experienced continued growth in your investment, but in 2008 you would have experienced around 30% decline in your initial investment.
Phased investment over 12 months
In 2005 you would have experienced growth in your investment, although a reduced total amount, as each subsequent investment tranche would have been at a higher price point. In 2008 you would have experienced a smaller decline in your overall investment, as each subsequent investment tranche would have been at a lower price point.
Phasing-in is not an exact science, but it is a prudent approach and common practice when investing large sums into financial markets that are considered to be fully priced. While you may lose some of the potential upside of an investment, you mitigate the possible downside. With a well-balanced portfolio and a long-term investment strategy, an opportunity cost is minimised.
The best time to invest is always 20 years ago. The next best time is today, no matter what the financial markets are doing. Contact your financial planner, and put the wheels in motion.