Stock markets have turned choppy after exceptional gains in 2009 and 2010. It is not hard to see why. The global economy seems to be sputtering. In the US, households are still deleveraging following the bursting of the property bubble. Japan is back in recession after its disasters. Asia and emerging economies are being threatened by rising inflation. Europe’s debt problems, meanwhile, remain deeply entrenched. In all cases, it is the public sector that is being challenged, either to rein in or support growth.
No wonder then that market sentiment has been volatile.
So what should you do when stock markets hit a speed bump? Some investors become fearful and take their money out. Others wait on the sidelines until the outlook becomes clearer. Why put in money or stay invested when stock prices could fall further, you may ask?
But it is the nature of markets to move up and down over the short term. Trying to predict their movement is hard, if not impossible. And markets often do the opposite of what you think they should. So your best bet is to stay the course, even during periods of volatility.
Research suggests that a systematic investment approach is often more profitable than one in which human judgement is allowed to play a role. Which is where the MIP (Monthly Investment Plan) comes in.
By feeding money into the market at monthly intervals the MIP allows one to build positions gradually. If markets stay soft, well, the more your money will buy at any given time; and if they go up, then your purchasing power goes down but the overall value of your portfolio increases.
The great thing about an MIP is the control it offers. You fix the amount you want to invest; you decide where you want to invest; and you can stop and re-start the plan at any time. It’s not a magic solution but it can help you avoid a lot of the common investment mistakes. Now read on…!