For the many beginner investors out there who aren’t quite sure how to get started investing, there’s a simpler way to get the ball rolling if you’re willing to wade into the investment waters at the shallow end, rather than overexposing yourself to the often-volatile equity markets without a full understanding of your own personal tolerance for risk.
Of course, it’s hard to know for sure how much risk you’d be able to take on if you haven’t been in the investment game before. Even for relatively new investors who’ve been invested for some number of years, it’s tough to gauge how we’d react until the first big market scare happens.
Indeed, for new investors who weren’t in markets leading up to the 2022 bear market or the 2020 stock market meltdown at the hands of the COVID crisis, it’s pretty easy to underestimate how we’ll feel when volatility goes into overdrive and our holdings’ value nosedives fast, perhaps a heck of a lot faster than originally anticipated.
Markets don’t always go up. That shouldn’t catch new investors by surprise!
When the time of panic comes, selling alongside most others can be the worst thing one can do, as some of the market’s biggest up days (think those sharp rebounds) tend to be in close proximity to some of the worst down days.
As such, staying the course rather than trying to time the market is often the best move, especially when you consider that many pros struggle to time their entries and exits from markets in a way that’d minimize pain and maximize profit. At the end of the day, when timing the market, you have to be right twice, at the time when you buy and when you finally hit the sell button. If you’ve got a long-term time horizon, you’ve just got to be right once as you sit back and let your stocks compound and pay you dividends over time.
In any case, I think it makes sense to invest all of the extra cash that’s sitting on the sidelines rather than waiting for the perfect moment or dollar-cost averaging over time, especially when you consider how far inflation has come in recent years.
Still, for new investors who have a steady paycheque coming in, I think the case for starting small can make a lot of sense. Whether it’s the limited ability to save amid the rising cost of living or the ability to keep buying more of your favourite stocks if a correction were to happen, slow and steady might be the move as new investors look to gain their “investment legs,” so to speak.
The case for starting small and going from there
Perhaps the best part about starting small, rather than investing the lump sum, is to set your emotions in a way that’s more conducive to generating wealth over the long run. If you put all your dry powder on a stock or the Vanguard S&P 500 ETF (TSX: VFV), which is a go-to one-stop shop I recommend for market newcomers, you’re going to feel good, even euphoric, when markets march higher. And when markets move south, you’ll feel not so great, maybe even a bit sick.
If you’ve been meaning to buy more on the way down (perhaps after a 5-10% drop), you might prefer that stocks were to go down on any given day, even if you had no intention of buying the VFV after a mild 3% pullback from highs. At the end of the day, each down day is a step closer to buying more stocks at lower prices, and if you’ve got a steady flow of income, perhaps it’s better for stocks to fluctuate wildly or even correct swiftly than continuously marching higher.
So, in short, the math says that investing the lump sum might be better. But, at the same time, new investors might wish to start small to combat the feelings that come with riding the market’s rollercoaster ride of emotions.