Investing regularly or once, that’s what’s going on here. Literally, the rhetorical question should leave every beginner, but also a seasoned investor, cold.
There is only one correct answer.
We won’t stretch you for a long time and we’ll write it right away. If you are considering a long investment horizon, the regular investment method is useful. It’s up to you how often you buy investment instruments – stocks, bonds, participation certificates. We will try to briefly explain to you the effect of regular investing on the compilation of your investment portfolio.
Buy cheap, sell expensive
The basic rule of any trader is to buy cheaply and sell expensively. In the case of securities investments, this principle is a pious wish rather than a reality. In capital markets, you can never know in advance whether prices are at their peak or vice versa. Read more: Earn ten percent on Czech dividend shares
What do investor lessons about peak and bottom say?
The right investor should buy as soon as the market he is monitoring reaches its bottom. Stock prices are cheap and can literally be bought for a fraction of the original price. On the contrary, the best selling opportunity is when the markets are at their peak. If an investor bought at a time when the markets were at the bottom and selling at the moment of reaching their peaks, he earns. And not a little.
However, the problem is not the actions in the sale or purchase of securities, but in estimating the moment when the markets are down or, conversely, up. Read more: Dividends in 2011: Four Tips for a Good Yield
In addition, the rule “buy cheap, sell expensive” leads to market timing, which is a major problem for investors with a long-term investment horizon. Market timing is based on estimates of securities prices and their future development. The problem is that even professionals do not know when the best time to enter the market, and therefore the moment of his appearance. In order to avoid unnecessary investment losses, procedures have been devised to prevent market timing.
Long-term regular investment
The basic approach that will allow an investor to succeed in the market from a longer time horizon is regular investing. This eliminates the need to time the market and, in the event of a misjudgment, be ashamed that the investor has fallen victim to the erroneous predictions of analysts and economists. In practice, the loss from the purchase at the time when the investment was at its peak will compensate for the cheaper purchase of the same investment at the time when the investment was at its bottom.
If you are going to enter the capital market for the first time and start buying securities, you should not make the usual beginner’s mistake. It consists of a kind of micro-timing, when a beginner makes his first investment for a larger amount than he wants to invest regularly for. If you want to invest five thousand crowns a month on a regular basis, for example, you should not spend an amount that exceeds this regular investment several times at the very beginning. A certain exception in this case are mutual funds, when it is necessary to make a one-time higher investment. However, we know from our experience that it is possible to negotiate with an investment company and reduce the initial investment a bit.
The benefits of regular investing
Let’s summarize the benefits of regular investing. Regular purchases will reduce your potential loss, which is based on continuous fluctuations in the capital market and also by the fact that no one knows whether the historical bottom or peak will continue.
Determining the starting value of your partial investment is also related to regular investing. If you change it constantly, ie once you buy it for two thousand, other times for five thousand and then only for five hundred, you will be constantly tempted to micro-time the market. Investors in mutual funds have it easier, as the value of unit certificates is flexibly converted to a predetermined volume of investment. It is worse if you buy shares whose price will be in hundreds of crowns or thousands of crowns. You will not always be able to buy shares without any amount left. Of course, you can save this in a savings account and “stick” it to another investment, or once a year make an extraordinary purchase from such blinded residues.