MARKET OPPORTUNITIES

& REGULAR SAVINGS PLANS

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‘BUY LOW, SELL HIGH’ –
THE GOLDEN RULE OF INVESTING?

Theoretically, to make money in the stockmarket you need to buy shares when prices are With this certainty of knowledge, it would be simple to buy during the period of low
low and sell them when prices are high. Repeating this recipe for success should provide prices and sell at the market high a fortnight later, repeating this strategy every month
ever-increasing wealth. and becoming wealthy in the process.

Q Sounds simple. And yet, if so, why are we not all millionaires?

A
For two reasons:
But unfortunately markets do not abide by these rules in reality. Attempting to ‘time’
buying and selling decisions in the short-term is a dangerous game, and one that very
few professional investors manage to perform successfully on a regular basis.
This is because markets are erratic – they can rise gradually over a number of days before
suddenly falling and losing the previous gains (see chart below). Unexpected news,
either specific to one company or the economy as a whole, can greatly influence stock
prices in the short term.

1 2
Firstly, markets are not Secondly, many investors
predictable and can move fall into the trap of letting
...instead of unpredictably
quickly and erratically their emotions overcome
in either direction. sound investment decisions.

MARKETS ARE UNPREDICTABLE

IN THE SHORT-TERM

Wouldn’t investing be so much easier if the stockmarket moved according to a strict set
of agreed rules or guidelines over time? For example, imagine if prices rose in the first

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week of every month, remained steady for another week, before gradually falling back to

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the previous levels – and that this pattern was repeated again and again as per the
theoretical diagram below.

If only the stockmarket behaved rationally...

THEORETICAL ILLUSTRATION ONLY

Q So if investing is so unpredictable, why should I bother at all?

And how do people make money?

A
Simply by taking a different perspective
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THEORETICAL ILLUSTRATION ONLY

UNDERSTANDING
INVESTOR PSYCHOLOGY
It is human nature to have hopes and worries when it comes to our money. However,
sometimes these emotions can take control of our decision making to our detriment.
The two most powerful emotions when investing are hope and fear – and both can often
derail sound investment strategies.
CASE STUDY: Fear
Susan, 32, has a dream of buying a house in France by the
age of 40 and holds a well diversified international growth
portfolio. After an initial lump sum investment of €10,000
she has been contributing €500 a month through a
regular savings plan over a number of years. After a
prolonged period of solid returns, recent market volatility
has seen the value of Susan’s portfolio decline by over
10% from its highest point. Fearing that she will lose
more of her hard-earned money, Susan decides to cancel her regular savings plan
and immediately sell her portfolio and move the money into cash. She believes
that “there is no point investing in shares when market performance is so bad.”
Analysis
Susan’s behaviour has been affected by feelings of loss & regret.
In Susan’s situation, the fear resulting from the decline in her portfolio outweighs
the potential for near-term growth.
Although Susan was previously comfortable with the risk associated with her
portfolio, witnessing the impact of short-term market weakness on her portfolio
has caused her to panic and make an irrational decision, which could be very costly
for two reasons.
Firstly, Susan has sold out at a time of weakness when the market is ‘low’, which is
theoretically the worst time to do so. Her behaviour has ensured that she will now
not be in a position to benefit from any near-term market recovery.
Furthermore, Susan has abandoned her long-term investment strategy which may
result in her not realising her dream as planned.
CASE STUDY: Hope
David, 38, has been investing in shares for over 10 years.
He initially held a well-diversified portfolio of equity funds
in the mid-1990’s, which performed strongly for a number
of years.
However, David began to feel as though he was missing out
on the rapid growth of technology companies, as his
portfolio only had a small amount of exposure to that sector.
Deciding that tech stocks were the best performers based on
recent results, David sold his portfolio in 1999 and bought shares in a small number
of speculative technology firms. After a few months of strong growth, the shares fell
sharply in early 2000 and by 2003 had lost over half their total value.
Frustrated, David sold out and decided to wait for the next ‘sure thing’ to make back
his money. After watching the market carefully from the sidelines as it has risen strongly
in recent times, David now believes that resources companies are the way to go, and
invests his remaining savings in the mining sector. He also takes out an investment loan
in order to make up the lost ground from his last unsuccessful foray.
Analysis
David is no longer applying sound investment strategies such as diversification
and taking a long-term investment horizon, because he is being too hopeful.
Acting purely on emotion, he is chasing a quick win regardless of the high risk
involved. While he knows logically that chasing a recent strong performing sector
is a foolish strategy, he is currently acting irrationally, clouded by his anger
at previous losses.
Even if he gets lucky and makes some money with this approach, would David
then return to a safer strategy? Unlikely. Fuelled with confidence from his success
he will probably continue to take larger and riskier bets, similar to a gambler
at a casino, until he once again comes unstuck.
TWO SECRETS FOR DEALING WITH 2) Market weakness may present opportunities

VOLATILE MARKETS RATIONALLY American billionaire Warren Buffett (pictured) is commonly referred
to as the world’s most successful investor. For over 50 years,
Buffett has continued to grow his fortune - not through complex
1) Remove emotion with a regular savings plan strategies or a magic formula - but by adhering to basic
investment principles in a disciplined manner.
How do you decide when to invest in a volatile market? A regular savings plan could
be the answer. When the US stockmarket fell following the ill-fated tech-boom
of the 1990’s, many investors were selling their holdings in fear
By investing a consistent amount at regular intervals, you can gradually ‘drip-feed’ into the or watching nervously from the sidelines. Not Buffett. Applying the golden rule of
market regardless of the price on any given day. This strategy is known as cost averaging investing - buy when prices are low - Buffett quietly went about accumulating over-sold
and can help smooth out the effect of market changes on the value of your investment.
‘cheap’ stock in a number of stable, quality companies such as Gillette and Coca-Cola.
The power of the cost averaging strategy is that it takes advantage of price movements,
The market soon realised that quality blue-chip firms were unaffected by the tech crash
as you will buy more units when prices are lower and less when they become more
and were still making excellent profits. As such, they quickly returned to their previous
expensive, as shown in the example below.
valuations. Within three years, the US stockmarket was up over 50% from its lows.
Buffett, having selected better stocks than the market average, performed even better.
REGULAR SAVER – Invests €1,000 per month
Market lows – an opportunity
Example of monthly savings plan and ‘cost averaging’ 2000

Data: S&P 500 Price Index (US$). Basis: nav-nav.

30 80
unit price units bought 1800
25 70

This example uses assumed figures and is for illustrative purposes only. *Fractional units ignored.
60

Units bought*
Unit price (€)

20 1600
50

S&P 500 Index

15 40 1400
10 30
20 1200
5 and then
10 enjoyed the
1000 strong returns
0 0

Source: S&P
1 2 3 4 5 6 over future
Month 800 years
Buffett bought
during market lows
LUMP-SUM INVESTOR – Invests €6,000 in month 1 600

De -01

De -03
De -00

De -06
De -04
De -98

De -02

07
De -99
De 97

De 05

Ap 06
Au 7
Ap 1

Ap 3

Au 5
Au 2

Au 4
Ap 8

Au 0

Ap 0

Au 3

Ap 04
Ap 9

Ap 2
Au 1

Au 6
Au 9
Au 8
Ap 97

Ap 5

r-0
c-0

c-0

r-0
r-0

r-0
c-9

r-0

c-0

r-0
c-9

c-0
r-0

r-0
r-9
r-9

c-0

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Au
After six months investing, both investors have invested €6,000 but the regular saver has accumulated
more units and has an investment worth more than the lump sum investor.
LUMP-SUM INVESTOR REGULAR SAVER So, next time the market falls, think rationally and remove emotion from the situation.
Total invested €6,000 €6,000 As long as you have a long-term time horizon, view the short-term weakness as a
Average price paid €20 €20 potential opportunity for buying more equities at cheap prices.
Total number of units bought* 300 310
Value of investment €6,000 €6,200 To make it even easier, managed funds managed by professional fund managers such as
Fidelity do the hard work for you, by constantly reviewing the market for the best
opportunities and investing on your behalf. You should be aware that past performance is
not a reliable indicator of future results. The value of an investment can go down as well
Key facts about ‘cost averaging’: as up and you may get back less than you invested.
• Investing at regular intervals smooths out highs and lows over time
• In a fluctuating market, cost averaging can allow you to benefit from buying But remember, you can’t invest successfully if you don’t invest at all.
more investment units when prices are lower
Fidelity only gives information about its own products and services and does not provide
investment advice based on individual circumstances. If you are unsure which investment
is right for you, you should contact a Financial Adviser.