Is Now a Good Time to Invest?
Recently, I've been getting a lot of people asking me, "Is now a good time to invest?" After the reaching record highs in February, the share market has fallen approx 30%. There's no doubt we are seeing some extraordinary value at the moment. However, before putting your hard earned cash into the market, caution is advised. I'm not sure if the bottom of the market has been reached. It may go further down still. You don't want to make the same mistake that Gerry Harvey (co-founder of Harvey Norman) made a few weeks ago when he dropped $15m into the market. He lost $1.5m a week later Essentially, he made 2 main mistakes:
1. Dropping a lump sum in all at once 2. Picking companies such as Woodside petroleum, BHP, the big 4 banks etc.
Both these approaches have different levels of risk, which I'll explain in more details. Dropping in a lump sum at a particular point in time involves the risk of hitting the market at the wrong time. This risk can be reduced by using a strategy known as 'Dollar Cost Averaging'.
Dollar Cost Averaging is an strategy where one invests smaller, fixed amounts on a regular basis over an extended period of time. For example, instead of investing $6,000 in one transaction, you could invest $1,000 per month over six months.
The other mistake I believe Gerry made was the choice of assets. As you can see from the choices he made, there is a significant exposure to fossil fuels which now carries a 'Stranded Asset Risk".
Stranded assets are investments that are not able to meet a viable economic return and which are likely to see their economic life curtailed due to a combination of technology, regulatory and/or market changes.In December 2015 almost 200 nations agreed to limit global warming to well below 2°C, with an aim to stay below 1.5°C. Clearly, the deal signals the beginning of the end for fossil fuels. Science tells us if we are to stay below 2°C, around 80% of currently-held fossil fuel reserves can’t be burned. As the world moves towards a low carbon economy, experts have warned of a ‘carbon bubble‘ caused by fossil fuel companies and their assets being overvalued. Deutsche Bank research warned ‘peak carbon,’ rather than peak resources, could drive the end of the fossil fuel industry as we know it.
The way to avoid Stranded Asset Risk involves an ethical investment strategy. This type of strategy inherently manages other types of risk by choosing companies that in addition to their financial performance, also consider their environmental & social impact. Some other mistakes I've seen people make at the moment include: 1. Trying to short the market (i.e make a bet that the market will continue to go down) 2. Putting all your money into one of the banks Beneath all of these mistakes, however, lies a fundamental issue: GREED & having money as the main goal or primary motivation.
This, I believe, just continues to perpetuate the same old paradigm around money that the world has been running for over a century.
Many of the worlds wealthiest people, however, don't have money as their main goal or primary motivation. They have a purpose or a mission and money is made as an outcome of that purpose. So, if you want to make money, firstly become clear on who you are, what your purpose is and what your values are. Focus on that and the money will follow.
Before making any investment decision ask yourself, "What value is this going to bring me, my family, my community and the planet"