Step 6: Keeping it regular

What we’ll cover:

• There are pitfalls of trying to ‘time the market’
• There can be psychological benefits to setting up a direct debits

The long term historic direction of the stock market is upwards. There will be wobbles (volatility) along the way, but as long as you don’t try to outsmart the wobbles by trying to predict them in advance, you will be okay and benefit from the upwards direction. Thinking you are clever enough to predict when the wobbles will take place and adding or selling investments accordingly is called timing the market.

Spoiler alert: thinking you are clever is the downfall of many investors.

Timing the market sounds good on paper. You buy low then sell high. That’s all there is to it. The trouble is that nobody has a crystal ball that can tell them when the stock market is going to go up or down (in the short term). And the reality is that the market can move significantly up or down in the short term, but not always in the direction you might want it to go in. This is why timing the market can be dangerous.

If you were fortunate enough to have a large lump of cash that you wanted to invest with, but you put it all into the stock market on February 28^th 2020, three weeks later it might have been worth 40% less thanks to a rapid and largely unforeseen market crash. It could then take years for its value to recover. If you started to drip feed your cash into the stock market, starting on that same date and continuing over the course of the year, you would have smoothed out this dip such that your account balance would have barely dropped (or maybe even benefited).

We a big believers in making regular investments into the stock market. This averages out the peaks and troughs of short term wobbles, and gives you the best chance of taking advantage of the historic 6-10% annual increase.

The best thing about making regular payments is that you can usually do this through a direct debit or standing order to your investment account. Why are direct debits so great you ask? I will tell you. Its because it forces you to not think about what you are doing. You pick your investment strategy, set up a direct debit, then stick to it. Without a direct debit, investors start to do that most dangerous of activities – thinking they are clever. The problem with thinking you are clever, is you start to make decisions that aren’t in your best interests. Like, for example, not making your normal monthly contribution because the market is heading downwards and because of this missing out on it rapidly moving back upwards.  

Having investment contributions coming out your bank account works well on a personal finance psychology level too. It means you are investing in your future first, then deciding how to spend what’s left over later. It means your financial future is your top priority and investing in it happens each month come rain or shine. Its also easier to maintain these contributions because you get used to the direct debit coming out of your account when you get paid. It just feels like any other deduction from your salary, like pension, tax, charitable donations, etc.

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Concluding Points:

• Most people are paid monthly. Setting up a direct debit to invest into the stock market is good because:
  • its easy and you don’t have to think about it each month
  • it helps iron out some of the short term volatility