Long Term Investing

Q. How important is timing when I'm investing passively for the long run?

Should I just get into the market now and not wonder when might be the best time?

A: If investing long term (10+ years) timing is not very important and can even be dangerous. I will assume that you have a full-time job and other interests because if that's the case you have no business trying to outsmart the market.

The best you can do is to either invest it all now or try to invest it in smaller chunks over a fixed period. Remember, however that once you decide on a plan it is important to stick to it. It won't service you well if you decide you'll invest X every third of the month only to decide on the second month that you're going to wait a few days for a correction. Opinions differ on whether you should dump it all in at once (I'm inclined towards this) or spread it out so you might want to think on that but past research shows that cost-averaging doesn't work.

Q. I'm afraid I lost an opportunity not having invested when the Dow was at the 7900 level...

I'm looking to invest 32k in my SIPP long term but was waiting for the market to dip a bit, hoping to buy when the Dow was in the low 7000's as it reached 7900 at one point and I've read so much about catching a falling knife that I just wanted to wait a bit longer. But now the Dow is up to some 9000 - was it a mistake? Should I invest now or wait some more?

A: This is market psychology. Rising prices tend to make you just as nervous as falling prices. This is why it is important to identify goals and use those to distinguish the logical choice of action. If you're investing for the long term, you shouldn't let 10% moves throw you off.

The thing is that the longer you keep your money out of the market, the less 'edge' you'll get from passive investing. To counter this edge, you must be able to time the market sufficiently. But in such instances what will happen is, the market will dive, you'll wait for it to go down 'just a little more', then it will bounce, you'll wait for the next correction which will never come. Or it'll keep going up. Either way, you miss out on valuable time appreciation. So just do it now and forget it for 10 years.

Q. What if I just buy the FTSE 100 as a spreadbet and keep holding?

I've just bought the year end FTSE 100 @5679 for a unit stake/pt. The cash market was 5770. I've deposited 300 x my unit stake.

If the market produces its expected annual return of 7% (not counting dividends) then this would be about 5.3% given time remaining in the year. This would take the FTSE 100 to 6076. If I allow my bet to run to expiry then at this level I will have made a profit of 397 x my unit stake.

Clearly any one year can be extremely volatile and result in either a loss or gain. But if I repeat this excercise year on year then explain to me why the odds are not in my favour to make money on average.

Genuine question btw as I'm scratching my head a bit with this. It may not seem it but I'm normally very much in the 'no free lunch' camp!

A: You don't need much volatility, you could be steadily rising most of the year and one spike down 300 points (or wherever the margin rules put the kick out point) for a couple of hours, or a couple of minutes even, and you're out. that said as such that is not a bad bias, it's just a bit risky.

If you just play once a year you should get similar odds to the long only position, just reshuffled a bit, so it's fine, if still not a free lunch. The key in this example is that you pay one round trip for a period where you expect +7% so if the costs are less than that, and they should be, that's fine. an annual return of 7% translates to peanuts as a daily return, and the cost of a day trade is the same as a long trade. spread betting used with an average trade length of one year and with no rolling/financing charges is most likely OK. bit atypical to use it like that though, and I don't think it's the kind of customer the brokers are hoping for. :-)

Note: To comment about the free lunch: The 'futures' spreadbet discount the future price to today, to reflect the effects of dividends and interest. Presently, interest is zero which is why you get a very good deal, with dividends the cost of carry is negative. If rates were a more normal 4% you'd be charged that (minus divs) to hold the position.

Q. I've just turned 18 and looking to invest in a fund - but which fund to go for?

The more I research the more I'm ending confused - there are so many different funds; one that I'm looking at is the Fidelity Freedom 2050 fund. What's your opinion?

A: It sounds like you have already chosen the fund you want to invest in so I'm not sure what you're asking exactly?

However, think about this: if Warren Buffett was starting out at 18 and he was going to invest his own money only, I am quite 100 per cent certain that he wouldn't invest in any type of fund. So why don't you consider spending time reading about how great businessmen and investors have accumulated their wealth?

At some point you will realize that there are thousands of stocks to choose from, so why not stick to good companies, and leave the horrible ones alone? If you read sufficiently enough, you will eventually understand that the mindset to have is that you are buying a piece of a business, and not a stock price. Thus, you can then take a look at 100 or so businesses and invest in the 5 or 10 that are the best. You wouldn't want to own a piece of all businesses in your home town. You would certainly want to eliminate the bad ones, the ones with terrible financial structures, and the ones with dishonest management, so why own a group that includes some bad ones?

If you forget about the stock price for a minute and just look at the business, you will find plenty of good businesses that will increase in value over time.

There are a million ways to go broke, so I would study the fundamentals that Buffett uses if looking into long term investing...and not stray from them. Most people get cute and start buying stock prices...and they get crushed. If you are going to invest at all, I would suggest being a winner, instead of guaranteeing yourself a mediocre result by buying a fund.

Also, the less risk you take the better your reward. If you have a company that nets one million per year and you pay 5 million for it, you are paying 5 times earnings, and your risk is less than if you paid 8 million, or 8 times earnings. There will be good companies selling for great prices for the rest of your life, and many of them you haven't even heard of. Avoid the CNBC type hype stocks like Apple, etc. There are over 6,000 companies listed on the NYSE alone.

 ...Continues here - Having a Good Trading Plan

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