Generally, You Want to Jump In
... But There May Be Tactical Reasons for Delaying
New subscribers often ask me whether they should ease into a new investment strategy gradually, or jump in with both feet. It’s a practical, nuts-and-bolts question, and although it’s not deeply complicated, it deserves a bit of thought.
As a rule, my bias is to jump in with both feet … but not necessarily right away. Here’s why. If you’ve done your homework, and chosen your strategy carefully, then you have good reason to believe the strategy will be profitable for you.
At the simplest level, if the strategy is destined to work well, the sooner you get your assets deployed, the sooner you begin to profit. If, instead, you tiptoe in, some of your assets will be on the sidelines for a while.
The reason some people want to enter investments gradually is that it reduces the risk of incidental bad timing. (What if the market is about to top out? What if some stock (or strategy) is just about to go out of favor?)
Of course, the gradual entry reduces the chance for fortuitous good timing just as much. So with gradual entry, both happy surprises and unhappy surprises are reduced. But (again) if the stock or the strategy have positive expected return, every dollar delayed is a dollar unemployed.
But that logic doesn’t apply at every moment.
There are times when there is a specific reason to delay entry, typically because a particular event or piece of information is forthcoming. Such an event might be an economic release (GDP, housing starts, inflation, etc.) when it’s subject to unusual uncertainty (and therefore risk).
You wouldn’t want to delay action every time there’s a government info release scheduled; the calendar is full of them. But once in a while there is unusual anticipation or uncertainty about forthcoming data.
Another wait-and-see occasion would be the timing of fresh analysis or advice.
This comes up from time to time with my Cabot ETF Investing System. The System consists of a monthly issue and weekly updates advising subscribers about selection and timing with market sector ETFs. The monthly issues are published on the fourth Tuesday of the month, and each includes a fresh evaluation of market sectors. When a new subscriber asks during the first few weeks of a month whether to jump in or wait, I often suggest waiting for the next monthly analysis. It’s frustrating and a little costly to buy sectors A-B-C one week, only to be told to shift to B-C-D the next week.
Speaking of sectors, our ETF selections have not been invested in the Technology sector (XLK) for months. And XLK has been lagging the market in recent months, due in part to the remarkable weakness in Apple. (AAPL, down almost 40% since September, accounts for about 15% of XLK).
But the time will come when XLK comes back on to our Buy list. When it does, we won’t want to wait, and we won’t want to nibble a little at a time.
Once we know where we want to be, we want to get there ASAP.
There’s a more general principle arguing for rapid deployment.. And it’s a principle worth remembering in all our investing. At any given buy-point (either for a specific stock or ETF, or trading for a new market up-trend), you know more than you’re likely to know at any further time in the position.
Almost by definition, a fresh buy decision arises when multiple factors come into favorable alignment. Then, almost at the moment you make the buy, some of those factors start to dis-align a little. Then a little more. After a while you may have quite a few conflicting indications.
(Once in a while things re-align, but with so many forces and factors in play, the law of “entropy” will almost always prevail over time.)
So when the information or analysis behind the position may be growing a little stale, that’s a good reason to be careful about entering new positions … and perhaps wait for fresh analysis.
But tactical delay for a specific event is not the general rule. In general, you want your assets working as fully and as effectively… and as early as possible.
So take care in selecting or assessing a strategy, then once you’ve decided, consider whether specific short-term factors deserve temporary pause. When ready, jump in with both feet.
Your guide to ETF investing,
Editor of Cabot ETF Investing System
P.S. Over the past 10 years, Cabot ETF Investing System has earned 156.66%.
Over the same period, the S&P 500 earned just 111.79%.
Which means that if you'd put $100,000 into this system 10 years ago, you'd now have $256,660 having gained nearly $45,000 more than the S&P 500.
You'd have earned these gains with LESS RISK, as you'd have been parked safely in money markets part of the time.
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