Investors face many dilemmas when investing. Greed and fear play havoc with our emotions and frequently cause investors to buy high and sell low. Choosing one company over another is another tough choice and involves a subjective assessment of risk versus return. Yet another tough decision to make is whether we should regularly deploy our capital into the market, or to wait for a crash so that valuations are more attractive.
The topic of waiting is a pertinent one, as many investors may have their own assessment of overall valuations and sentiment and would act according to that assessment. Waiting too long results in cash languishing in the bank earning paltry returns.
On the other hand, deploying capital too quickly may also result in less availability of cash when a crash does come round, and investors may also face the problem of elevated overall valuations. A mental tug-of-war then breaks out in the investor’s mind — to invest now, or to wait further?
Waiting for an uncertain event to arrive
The problem with bear markets is that they do eventually arrive (if one waits long enough), but their timing is highly uncertain.
Such events also do not occur with regularity, and the time to wait between one bear market to the next could stretch into years. Investors who sit and wait patiently for a bear market to arrive end up seeing their cash languishing in bank accounts earning close to zero returns. Waiting is highly detrimental to the compounding process and would set the investor back greatly in terms of wealth-building.
Deploying capital slowly and steadily
A better suggestion would be to inject capital into promising companies at a slow and measured pace. By doing so, we would ensure that capital gets deployed to good opportunities over time, and the process of compounding would work wonders as investors would also receive dividends which they can reinvest. Investors, however, need to ensure that they have a requisite margin of safety as normal markets usually present fewer opportunities compared to bear markets.
Having the discipline to wait
Investors need to harness their willpower in order to have the right discipline and mindset to wait for juicy investment opportunities to present themselves. It’s futile to try to time the arrival of a bear market as such events are rare, and no one has been able to predict either a recession or a bear market with consistent accuracy. Instead, it’s much better to practise regular deployment of capital in order to ensure one is exposed to the growth of good companies over time, and also to receive dividends which assist in one’s cash flow.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.