If You are in, keep your nerve, and re-visit your plan

We should all also revisit the original intentions behind the investment strategies that we now appear to be stranded in. This is particularly apposite for those who are saving each month into regular contribution plans.

First, placing regular contributions in unitized mutual funds is a different investment philosophy than investing lump sums. Timing is more important with lump sums; each transaction can only be bought and sold at one price differential. Therefore to make a profit out of lump sum investments, the simple fact is that you have to sell at a higher price than the one at which you bought.

The difference with regular contribution plans is that the objective is to sell at a higher price than the average price that was paid for the units. Timing is less important, and regular contributions should be used in one of two ways:

1. In conjunction with short-term volatility to amass capital in sectors, which are or have been undervalued, i.e. geographical markets which have suffered long-term depression, but which have the underlying size and economic stability to arise from their problems. The latter point is a vital one. You have to have long term confidence in the markets you are investing in. If there is no prospect of any future upturn in the value of the market, (within your timescale) then you have no choice. Get out now. However, think carefully before you do, are future prospects really as bleak as current circumstances suggest?

2. By building capital in secure, non-volatile holdings with the intention of buying into those markets, which have fallen sharply when those falls occur.

The two investment strategies above, for regular contributions, are not mutually exclusive. In my view, they should be used in conjunction with each other. However, they can increase the risk to capital, as just because a fund has fallen sharply, it does not always follow that the outcome will be an equally sharp rise. Some funds fall and continue falling, and you should always remember that the values of shares can and will fall as well as rise, and that you may not get back the amount invested, particularly in the early years of an investment.

With Equity markets the simple tactic of buying cheaply to sell dearly can only be achieved by either remaining invested for the long term, or by buying into markets while they look unattractive to others. Following the herd only makes money for those outside of the herd.

As a rough rule of thumb and as a fairly simple investment philosophy, try this for size. For the majority of any reasonable period of time markets will plod along consistently, moderately, with daily movements up and down, generally reflecting fair long-term value for money. This trend usually continues with, hopefully, a gradual upward movement. During these periods, while there are few obvious buying or selling opportunities, time should be spent in building as much capital as possible from regular contributions, in preparation for the next stage.

Generally, the markets will then climb towards a peak, often at the end of a long period of relative inactivity, as an increasing number of investors start to believe that prices will never fall, resulting in a period of over valuation. This is usually when the herd gallops in, buying into markets and funds with little regard for fundamental value. This always results in the markets firstly correcting, and then over-compensating, so that prices fall and stocks become undervalued, sometimes substantially. It is at this point that the investing cattle rush around like headless metaphors and stampede out, driving the prices even lower.

If you are to be a positive investor, you have to be in a position to take advantage of these movements, building capital during the lulls and waiting for the high points at which to sell and move back in during the lows. The alternative, a more passive route, is to invest when you have the cash available, to sit out the inevitable falls and rises of the market, and then to reap the rewards of long term upwards market movement.

Most passive investors will show a good return over the long term, particularly if they hold their nerve during a period like we are currently experiencing. However, by fine-tuning your portfolio, spotting the trends and avoiding the herd mentality, the returns and profit realized can be satisfyingly greater.