Follow Through Your Investment Plan

Today, I encountered a comment from an investor who said that he felt that markets are too volatile currently and he will do dollar cost averaging at a "better time".

Below is the definition of Dollar Cost Averaging:
Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts.

Obviously, what the investor said above is not dollar cost averaging. He is trying to make purchases depending on market conditions. Which means, if he sets out to do dollar cost averaging initially, he is not following through his plan.

A lot of investors got panic lately and abandon their investment plan due to current market conditions. There is a saying - "If you fail to plan, you plan to fail". I would like to add that if you don't follow through your plan, your plan will fail no matter how good it is.

Stock Markets Are Leading Indicator

Dear readers,

A lot of people had asked me - Since every other day we heard and read reports that so-and-so bank is failing, why are you still investing in the stock market?

This is because stock markets are leading indicator. Which means, what you are seeing now (like bank failures, credit tightening, slowing economy, recession etc) are the outcome of this crisis. These events are the effect of this crisis, and not leading to this crisis. Bank failures doesn't lead this crisis. Slowing economy doesn't lead this crisis. This crisis started long before that. Therefore, the events that you are reading in the news and papers are in fact lagging indicators.

Since stock markets are leading indicators, one should not be afraid of investing in the markets when there is bad news all around. Because the valuation of the stock market would have reflected all these bad news by now. What we are concerned are signs of recovery, not effect of this crisis. Once there is a sign of recovery, the markets will rally even if the economy might not be in good shape. And if you wait until then, you might have missed the boat.

What should an investor do then? The key is to stay invested at all times and ride out this crisis. Try not to monitor the markets every minute because it is stressful and not productive. Have a diversified portfolio, continue with your investment plan and sleep well at night.