Time is a crucial factor when it comes to investments. As in sailing, the sooner the wind in your favor is caught, the more you benefit from it. From this point of view, a crisis like the one we went through in recent months is really an opportunity, because every crisis involves a fall in prices and therefore a lower cost of access to the markets. But prices do not drop indefinitely, because once they reach a certain threshold they become too attractive for those who want to invest and therefore trigger a race to buy that leads to a recovery, which promptly translates into an increase in the prices themselves. No less than the sailor, the investor must move with timing : sooner or later the calm always ceases, at sea as on the markets.
But just as the good sailor knows how to unfold his various sails at different times, based on the winds, so the investor can dilute his investment over a longer period of time. This allows him to overcome the anxiety of having to seize the right moment by exploiting the favorable currents if they already exist or by presenting himself ready to seize if these are yet to arrive. Beyond metaphor, an investment diluted over time allows you to:
- reduce the risk of entering the markets at a not particularly favorable time,
- enjoy greater chances of obtaining a return on your investment in the medium term,
- take the time to become familiar with the markets and evaluate the profitability of the planned investment,
- avoid instant enrichment effects, with any consequent excesses of euphoria or a sense of infallibility, and instead acquire the ability to manage progressively accrued returns.
The Reasons Why It Makes Sense To Invest Step By Step
In short, investing gradually allows you to see if the wind continues to blow in a certain way or if it changes. It therefore protects you from the natural volatility of the markets and allows you to reconcile the need for growth and protection of the investment capital.
In technical jargon, the strategy that allows you to combine growth (i.e. yield) and protection of invested assets is called dollar cost averaging. The dilution of the investment over time in which this strategy consists allows you to acquire assets at different times, at different prices. The greater the difference between the value of what was purchased and the price paid to purchase it, the greater the return achieved, because the return lies precisely in that difference. And vice versa, the smaller this difference, the lower the yield; in the extreme case, where the value of the purchase plummets to a price lower than that paid by the buyer, the return may not take place and give way to a loss. But the prices indeed dance, upwards and downwards, and therefore by making an average between the prices of the various individual purchases over time and between the value achieved by each individual purchase, the average return over time of your investment is obtained.
The more the investment is ‘smeared’, the more likely it is to remedy the bad days that physiologically happen on the markets (after all, the concept of a bad day is relative: it is wrong for those who buy a security that loses value, not for who sells that title before it depreciates).