Market To Market

I must confess there are only so many ways you can think about market cycles. Because the length of any one cycle varies, conversations can be short or long depending on how long the average cycle goes for and whereabouts you are at any particular point.

I listened to a podcast the other day talking about whether dollar cost averaging was a better method than putting lump sum into the market. They cite some papers about timing etc but these papers are from ETF providers so not exactly independent. It seemed to me that they are always asking the wrong questions and that is mainly because they don’t think about investing correctly.

It seems to me to be obvious that it would depend on really simple questions to ask. But the overarching answer to most questions is “it depends”. It depends on when you start, what the timeframe is, what the volatility is, and where in the market cycle currently stands. There is no specific question that gives you the answer. That is because of all the other issues you need to consider.

So asking which one is better is not the right question in the firs at place because it depends on so many factors.

For example, it is a matter of asking what is the potential return. That’s depends largely on where you are in the market cycle. Just because grandma leaves you $100,000 on Monday doesn’t mean you should invest it all on Tuesday. Nor does it mean you should dollar cost average. Again, it depends.

It depends on where you are in the current market cycle and that itself relates to the current valuation measured against the longer term base case (the mythical 8%) or you can check the earnings yield.

We are releasing soon a Masterclass titled Stocks versus Property but the reality is that it isn’t one versus the other. Again, it depends. Where is the current market in relation to the cycle, what the valuation is against the longer term average. What about volatility? what we wanted to show is the difference in the characteristics between the two asset classes because we think that delivers better answers than the way many currently look at the one or the other type question. The answer is never the same at every point in time.

If you can think about the investments in those terms then you are most likely to succeed by asking the correct questions.

That’s a good place to start.