When you do your weekly shopping at the supermarket, do you keep your eye out for bargains to fill your pantry? If canned spaghetti is half price this week, do you buy a couple of extra tins? Shopping for investments is just the same as buying spaghetti. We store investments to create wealth which can be spent in the future just as we store spaghetti in our pantry to be eaten later.
When is the best time to buy investments? When they are cheap. So when the price of shares drops, the logical thing to do is to buy more – right? Well, logical it may be, but human beings are strange creatures. When it comes to buying investments we seem to apply a perverse logic. Instead of celebrating the fact that there are bargains to be had, we complain that the value of the “spaghetti” we have in the “pantry” has fallen. This would of course be a problem if we had intended to sell the spaghetti this week, but it is reasonable to assume that this is not the case. What is evident throughout the history of sharemarkets is that investors buy more as prices go up, then panic and sell when prices drop. Yet logic tells us we should do exactly the opposite. The secrets of creating wealth through investing in shares are to be able to resist the emotional effects of price changes, to make sound investments at the right price and to take a long term view.
By nature, shares are volatile. Those investors who have the emotional strength to stick with the market through its troughs are rewarded with higher returns over the long term than are achievable through investments in fixed interest or property. Declines in the sharemarket are always temporary and should be seen as opportunities to buy.
One of the realities of share investing is that it is never possible to get your timing exactly right. Spaghetti might be half price this week, but next week it could be discounted by 60%, or it might be back up to full price. However, the longer the shares are held, the less important the initial purchase price becomes. If spaghetti increases in price to $5.00 a can in 10 years time, does it really matter if you paid $1.50 for it last week when you could have bought it for $1.25 this week?
If you are retired, you might argue that you won’t be around in 10 years time and that shares are therefore not an appropriate investment. This is not true. The biggest investment risk retired investors face is that they will outlive their investment funds. If you need $5,000 a year to supplement your pension and you live for less than 10 years, then you will require a maximum of $50,000 to be invested in short term, stable investments. Any investment funds over this amount could be invested long term (i.e. for 10 years or more) in shares for a higher return, thus reducing the risk of outliving investment funds and increasing the value of your estate.