I have had a few readers in the past few weeks email me asking why I continue conduct a monthly stock purchase programme with my broker seeing as though markets are terribly high as present. In the post, I will explain why it is prudent for individual investors to ignore market fluctuations and invest money every month.
Market Timing Is Impossible
Throughout the current bull market and especially in the last few years, many have predicted that the market will come crashing down due to highly elevated and over inflated share prices. But time and time again, the market has proven them wrong. Just look at the past 12 month, many people thought not only a correction was due but a market crash of 30%+ will be upon us. But the stock market paid no attention to forecasts and just continued to march higher.
But even though the stock market is high right now, I have no idea whether it will drop or go even higher. Market timing is impossible and that is why it is best for a small investor like myself to buy little chunks of stocks on a regular monthly basis. This way, I stand to benefit if the stock market moves higher or goes sideways. And if the stock market drops, I have kept enough dry powder on the sidelines to make large purchases should this opportunity arise. Investing on a regular basis seems like a win win.
Besides even when the stock market is overvalued, they are still companies trading at attractive valuations. It is important to remember that not all companies will have their valuations distorted. Just over the past 18 months, there has been some great opportunities to buy shares of companies operating in the oil, insurance, mining, healthcare and retail sectors. By forcing myself to make at least one purchase a month, I make sure that I don’t miss out on any opportunity when it presents itself. I make sure I do not suffer from the ‘ I will just wait till the stock price drops a little more’ syndrome.
Dividends Act as a Safety Net
Even when the best of companies become moderately overvalued, it may still be a wise decision to place a buy order. Each dividends payment mixed with growing earnings act as a countervailing force against eventual P/E compression from a market crash.
Just look at my article ‘should you buy shares in an overvalued market’ to see a real life example of this using Royal Dutch Shell (RDSB).
The advantage of investing in blue chip companies is that even if the share share price is a little overvalued and it subsequently falls over the next few years, the dividend payments that flow your way can actually lead to you making a positive return on investment. Before you let the threats of market corrections deter you from making investment into high-yielding stocks, consider how the dividend payments plus earnings growth will act as a countervailing force against any possible P/E compression.
Allows me to take small positions in companies
Due to the low cost of £1.50 fro the monthly stock purchase programme as opposed to the normal dealing fee of £9.95, it is justifiable to make small purchases of c£150 in companies. Paying a dealing fee of £9.95 for a £150 stock purchase is madness due to the commission being almost 7% of your purchase. Paying high fees relative to your investment are a huge drag on performance!
Look at my purchase of Lamprell for instance. I was confident it was undervalued. But I didn’t have the conviction to put £1000+ in the stock. Thus, I bought into the company using the monthly stock purchase programme as the lower commission allowed me to take up a smaller position. Another stock that I didn’t want to go big in was Burberry.
I am up over 20% in both these positions in under 6 month! If I was only making big purchases, I would not have bought the companies and would have missed out on great opportunities.
The low cost of the monthly programme also allows me to strategically increase my position in companies I am already invested in. I have used the monthly stock purchase to average down on positions such as Capita and Britvic and decisions to do so have so far been justified.
Time in the Market is an Investors Secret Weapon
For the average investor, time is the single most important factor when looking to build wealth via stocks and shares. For the small investor, time is a more important factor than the rate of return. A 10% annual return over a 20 year period generates more wealth than a 20% return over 10 years. You can’t control what kind of returns your investments will make, but you do have control over when you invest. So the earlier you start the better.
I Am a Dividend Growth Investor
As a dividend focussed investor, my main goal is to try an increase the dividends I receive from my ownership stakes in great businesses over time. In an overheated market, this is hard to do as I consider myself to be a very cautious value oriented investor. But by forcing myself to make a small purchase once a month, I ensure that I am not sitting on the sidelines waiting for the next crash to come. For all we know, that could be years away.
Even though I currently have 20% of my portfolio in cash, I know that just sitting on cash for a long time can entail much risk of opportunity cost, ie loss of income and price appreciation while cash is returning nothing. Yes, hold some cash, so that you can take advantage of opportunities when they arise. But at the same time don’t get left behind by holding cash for the sake of holding it – who knows how long it will be till there is a major correction.
How I Use My Brokers Monthly Stock Purchase Programme
I have signed up to my brokers monthly purchase scheme which allows me to buy shares on a fixed date each month for the low dealing fee of only £1.50. The dealing date is the 10th of each month so on the 9th, I look to see which companies shares are attractively valued from my master list of stocks and stick between £120 – £200 on that purchase. I have personally found this to be great as I can focus on buying individual attractively valued shares without worrying about the overall market.