There are probably two questions in investors’ minds today.
The first question is, have we hit the market bottom already?
Inevitably, the second question that follows is … assuming that we are past the bottom, does this mean that what we are witnessing now is a”real” rebound?
A futile exercise
Investors should realise that it’s a futile exercise in trying to predict if we have hit the bottom or if each rebound is the “real thing”.
The truth is, we will only know this in hindsight.
The stock market is forward-looking, often incorporating opinions and hopes about the future that are impossible to accurately forecast.
Even though the news on COVID-19 may still be terrible, the situation does not mean the market will continue to tank.
People may have digested the reality and, instead, are prepared to look six to 12 months with optimism.
There is, however, a better strategy to use when it comes to investing — the “4P” strategy.
The 4 Ps of investing
The four Ps of marketing are well-known: product, place, price, and promotion.
In the same vein, I would like to suggest the four Ps of investing: Plan, prepare, pace yourself, and patience.
Planning your stock buys is important. You need to know how much you want to allocate to stocks, and how much to retain for a rainy day.
Preparation involves ensuring that your cash is ready and available to be deployed when opportunities arrive. Being ill-prepared may mean missing out on opportunities to allocate your capital to well-run companies.
Pacing yourself is important as you would not want to run out of cash before the recovery arrives. Buying in small amounts ensures you have cash left over for future purchases and eliminates the stress associated with trying to time your exact entry.
Finally, patience is needed for your investment strategy to produce the results you want. A bear market may stretch for many months and test the resolve of even the most seasoned investor.
The mental challenge
The steps above may look easy, but in practice, they are not.
The challenge in sticking to a well-thought-out plan is psychological.
Some investors continue to have the itch to try to time the market. Others may falter when it comes to buying at attractive valuations due to fear or doubt.
It’s important to keep calm and rational during these tumultuous times.
Only then can we manage to achieve our investment objectives and compound our wealth into a beautiful nest egg for our retirement.
Get Smart: If you wait too long, spring will be over
Warren Buffett, the world’s greatest investor, has a wise quote back from the days of the Global Financial Crisis.
“If you wait for the robins, spring will be over.”
In simple terms, Buffett is saying that investors should not hold back too long in hoping for lower prices.
If the market decline has brought valuations down to attractive levels, it’s perfectly logical to start deploying some capital at regular intervals.
Investors who end up waiting too long may just miss the chance to deploy any capital at all.
So, take your time and pace your purchases.
Years from now, your future self will thank you for it.
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