Why waiting for a 'good deal' is a bad strategy
"You can't win if you don't play the game." —Robin Sharma
As the year-end holidays approach, many of you will be looking forward to travelling overseas. However, some of you may not have finished (or started) booking your travel or accommodation yet. Maybe you've been procrastinating, or perhaps you're hoping for some good last-minute deals.
Allow me to share with you what happened recently when a group of three friends and I decided to go on a trip overseas. After we decided on the dates, three of us booked our flights three months in advance so as to lock in the discounted airfare rate. However, the last of our group – let's call him Dan – decided to wait. He pointed out that with the ongoing airfare wars, airlines would release very good deals closer to the date of travel. He said they "needed to fill their seats", and travel agents who could not sell their packages would be forced to release their allocation.
We urged him not to wait, because even though we were travelling during an off-peak season, the early morning flight we had chosen was also popular with business travellers. However, he did not budge.
One month later, prices had risen by approximately 30%. Dan was still adamant that prices would drop closer to the date, despite us telling him not to wait any longer. Prices had already become more expensive. In the worst-case scenario, the flight would be fully booked and he would not be able to get on the plane.
Fast-forward another month, and prices hadn't changed from the previous month. Dan was happy. He felt vindicated, thinking that his 'strategy' was working and the price drop would come soon.
But then, two weeks before the travel date, the airfare suddenly doubled. The airline website showed that there were "only a few seats left". At this point, Dan was panicking. So, he swallowed his pride and bought his ticket, at double the price the rest of us had paid. Furthermore, as almost all the seats were sold out, he could only find a seat right at the back of the plane.
Sitting On the Sidelines - a bad strategy!
This story reminded me of the many times we've spoken to investors who were waiting to invest, keeping cash and hoping for better prices in future. Some investors always have a reason why they don't want to enter the markets yet: "The recession is coming", or, "the markets are in a mess right now", or, "Prices should be falling further", or, "It's already so expensive, let me wait until it's cheaper" are all very common refrains. So, they end up sitting on the sidelines as the value of their money slowly erodes from inflation.
However, when markets rise, they feel like it is too late. They could have gotten a cheaper price the day before. Now, prices are just too high to buy. So they decide to wait until prices go back down. But then when markets finally fall, they falter in their resolve and hold on, fearing a total market collapse. They decide to wait until the market stabilises. And then when prices start rising again, they regret not buying earlier, and they're right back where they began.
These are actually common behavioural biases that plague all of us. In Nobel laureate Daniel Kahneman's book, Thinking Fast and Slow, he notes that this type of 'pattern recognition' is part of what he calls our System 1 thinking. Humans tend to associate new information with existing patterns and expect those patterns to continue. Our behaviour is influenced much more than we realise by our present environment.
Think back to some of the global events that happened this past year. We had Trump upping the trade war tariffs and rhetoric, which cast a pall on most economies, a pro-BREXIT campaigner (Boris Johnson) getting elected into the UK prime minister's office, inverted yield curves, and slowing economic growth. And yet, despite all this, the markets have gone up. Did anyone expect that at all?
The market certainly didn't react how the majority thought it would. Investors trying to get ahead of the market would have been stressed out by the number of seemingly unrelated market moves.
The lesson to be learnt here is that markets are unpredictable. All the sound logic, reasoning and analysis in the world would not change that. It is thus no surprise that many investors feel lost, unable to find any solid answers for when would be a good time to enter the markets. The truth is, those answers don't exist.
What we do know, however, is that despite the volatility, empirical evidence shows that markets go up almost 70% of the time. That is why you can generate a return in the stock market, and is why people invest in the first place.
Playing the Game
So if you would like (or need) to invest, why wait? The sooner you get started, the better. If you needed to generate a certain amount of return in a 10-year horizon, but you waited 6 months for the market to become clearer, you would then be left with only 9.5 years to invest. Your horizon would have shortened, meaning you would then need to take a greater amount of risk to generate the same return. You would have lost valuable time to allow your investments to compound.
If you are concerned about suffering too great a loss from the ups and downs of the market, then work with your adviser to construct an evidence-based portfolio with the appropriate asset allocation for you. By increasing the amount of bond assets, you can also reduce the severity of a stock market drop. You should also set aside a buffer of cash that's enough to tide you over several months of your immediate living expenses. That way, you won't need to sell your portfolio assets, especially when markets are down.
As the earlier quote from author Robin Sharma said, you can only win if you play the game. Investing ensures that you maximise the opportunities to grow your money to meet future needs. Otherwise, you could be like Dan, waiting for the best time to buy… only to end up paying much more because you waited too long.
