Adjusting your investment sails

Buy the dips - the age old advice that has proven successful over the long term – is easier said than done when volatility returns to the market. It’s a challenge for those who want to invest but find themselves overcome by fear and unable to take action.

Over the last year, as forecast, we’ve seen volatility and market turbulence return. While this can be great news for good active investors, for the less experienced, it can cause paralysis. However, Autoinvest from Zurich might be one solution to this problem.

Investment paralysis

Currently there is over €100 billion sitting on deposit from Irish retail investors and savers. With interest rates for savers at all-time record lows, there is increased demand from customers for alternatives to the traditional savings account. But the natural alternative for many investment funds has experienced a period of volatility which can stop investors making a decision about moving their money.

Some would say they would rather leave their money on deposit until ‘the markets sort themselves out’. This seems to go against all investment logic, but from a human nature perspective, it’s completely understandable.

When to invest?

So when is the right time to invest? Unfortunately, there’s no right answer. We can try to calculate how markets will perform based on analysis of what’s happening in the global markets, but it is difficult give a definitive answer. These are volatile times, with investment markets subject to large swings in return – just compare Q4 2018 with Q1 2019. Therefore, some investors are understandably apprehensive about dipping their toes in the market, with timing an investment a key consideration.

Market timing can be a big dilemma, and in general retail investors have struggled with this. They perhaps incorrectly think that it requires constant monitoring of daily events and also requires the skill to benefit from market timing. This can leave investors with the desire to become invested in markets but not when markets are high.

Of course, this should only be a concern for lump sum investors. Regular savers and investors can benefit from the concept of ‘euro cost averaging’ so a period of market volatility can actually been seen in a positive light.

Cost averaging for lump sum investors

A phased investment strategy where you drip-feed your funds into the market over a period of time takes advantage of euro-cost averaging. This involves buying the same euro amount of a particular investment, at set intervals over a period of time. In general, more units of a fund are bought when the price is lower and fewer units are bought at times where the price is higher. Over time, an average price emerges, which will help reduce volatility. When markets have moved up broadly in a straight line, lump sum investing is more beneficial, and this has been the general market experience at various points in the latest cycle. However, this has not been evident over the last 12 months, and the concept of euro-cost averaging really comes into its own in markets that are falling, or are experiencing volatility.

But what if lump sum investors could benefit from the concept of euro cost averaging? Zurich’s ‘autoinvest’ strategy for investment bonds allows you to phase a lump sum investment into a chosen funds over a period of six or 12 months – thus potentially benefiting from euro-cost averaging.

Behavioural investment choices

Cautious investors, from a behavioural perspective, don’t necessarily concern themselves with getting the best possible return, but more with avoiding the worst possible return. As shown in the well-established concept of loss aversion, people tend to strongly prefer avoiding losses to acquiring gains.

The peace of mind that can accompany phased investing with autoinvest can be a powerful tool. Investors who have a lump sum to invest are often fearful that if they invest all of it today, this could be the height of the market, and should markets fall, it may take time to recoup their original investment – hence why so many people remain invested in cash.

If markets go up for another day they feel the market is gone too high and they’ve missed their chance. If markets fall they feel it’s the start of a bear market. This fear leads to the paralysis and inertia we see with investors today and no investment decision is made.

Autoinvest with Zurich could reverse this course. Euro cost averaging can be the re-entry point for the cautious or fearful investor. This phased approach will help investors who are making their first steps off deposit, and who want to gradually get in, rather than a full dive. Ultimately, instilling this sense of investment discipline removes some of the ambiguity and uncertainty that can present whilst gaining exposure to investment markets.