Getting invested in volatile markets

Don't be the deer in the headlights.

The biggest mistake I see after a financial windfall? Especially in markets like this? Sitting on cash, waiting for the perfect entry point — and watching the market leave you behind. So I thought I’d outline my thinking on this.

Don’t outsmart yourself

The best investors are slowly building empires. They’re not trying to pick tops and bottoms. They’re accumulating quality businesses at good prices, letting earnings compound, and reinvesting cash flows. This is all there is to it. It will take time to get there. But you’ve got to start somewhere. So start small.

Investing profits slowly, over time, is a relatively straightforward process. But, for many entrepreneurs, money doesn’t come out of the business in a steady stream. There are often very lean years followed by very profitable years. Sometimes there is the sale of a large asset, or an operating division. Maybe an IPO. Or maybe a full sale of the business. And so you have to deal with investing lump sums, which can be challenging, because you will be tempted to try to time the market.

I can tell you one thing for sure—you don’t want to sit in cash for too long. One thing I’ve heard from many individuals is that one of their biggest post-windfall mistakes was sitting on cash, waiting for the perfect entry point, and watching the market rise without them.

If the market is going up, the longer you wait to move forward with an investment plan, the more you’ll regret missing out on buying when stocks were “cheap,” and end up sitting in cash indefinitely. Or worse, you’ll capitulate and buy when prices are at their highest.

If the market is going down, you’ll sit on your hands, waiting for the “all clear” to finally get invested, not realizing that when things look safest, prices are often at their highest. And so you wait… and wait… and watch prices rise while you sit in cash, wishing you had put a plan in place when you had a chance. And when the chance does come along, the news is too grim to act.

The entrepreneur knows that ideas without action are worthless. The same thing applies to investing. Don’t hesitate your way to a “permanently temporary” cash portfolio.

You can manage this by ignoring the direction of the market while you’re putting money to work. Don’t obsess over your purchase price. Over the long term, decades from now, it won’t matter whether you bought a few percentage points higher. Don’t try to time it. You’re very likely to outsmart yourself.

Take small steps… quickly

So, how quickly to invest?

Finance theory says that you invest it all on day one.

You see, academics have run the numbers over the past century-plus of stock market history, and this history tells us that, the vast majority of the time, you are better off investing everything immediately rather than trying to gradually increase market exposure.

I can’t argue with that. It’s true. The numbers say so. If I tell a client to invest everything right at the outset, I’ll look like a genius the majority of the time.

But here lies one of the problems with relying too much on history.

Let’s say you invest everything on the eve of the 1987 crash. Or the 2000 dotcom meltdown. Or the 2020 COVID crash. Or right before “Liberation Day.”

History shows us that, each time, the market snaps back to new highs. But let me tell you something—living through these crashes is an entirely different feeling.

A market crash case study

It’s May of 2008. You just sold your business for net proceeds of $20 million, and you know that you now have enough money to safely see you through the rest of your life and to give your children a head start. You invest in a pretty standard portfolio—60 percent stocks, 40 percent bonds—and dream about your future. You can indulge in your racing hobby and already have your eye on the car you can see yourself taking onto the track next summer. You and your spouse are finally going to construct that wine cellar of your dreams and really build up that collection you started a few years ago. Your oldest is off to an Ivy League school next year, and you don’t have to sweat over how you’re going to pay for it. Things are taking shape. Life is good.

Fast forward to October of 2008. Lehman Brothers has collapsed. The world financial system is on the verge of a meltdown. And your portfolio is down 25 percent. In a few short months, your carefree future plans are put on ice and you have lost almost $5 million in the stock market. Almost a quarter of what you have spent the last twenty years of your life building has vanished into the ether.

Your financial advisor is telling you to stay the course. He’s got a lot of fancy tables and charts showing that you made the right choice by investing everything up front.

It’s cold comfort. You can’t sleep at night. In a few months the stock market casino has cost you more wealth than your parents amassed in their entire working lives, a few times over.

You want to stop the pain. And so you sell. I’ll sell it all, you think, and buy back when things calm down.

But you are shell-shocked. By the time you convince yourself that the economy is past the risk of a “double-dip” recession, it’s 2013, and the market has more than doubled from where you decided to sell. So you wait for it to come back down before committing more cash. It never does.

The human element matters

Finance theory has failed you. It’s great for textbooks and academic papers, and less helpful for guiding emotional, irrational humans in managing their life savings.

So my recommendation, counter to what the academic finance crew will likely tell you, is to scale in slowly over time.

I can’t run any simulations and I can’t point to any statistically significant evidence. But I can point to human nature, and to my experience dealing with clients who make the same mistakes over and over in volatile markets.

Investing too much, without appropriate experience in dealing with drawdowns, right before a significant market crash or pullback might just scare you enough to end your investment career.

So start off by committing a small amount to the market. Buy a bit more next month. And a bit more the month after. Keep going. For how long? There’s no definitive answer to this, and it depends on your comfort level with volatility. I would start with baby steps—maybe 5 to 10 percent of the total—and commit to slowly buying some stocks.

Keep it simple.

The rest of your cash should go into bonds (or bank deposit notes), which are short term and safe—now is not the time to get cute trying to earn a high interest rate in some specialty product. The bonds are just there to get you some kind of return while you decide what comes next.

We are here today. Who knows what comes next? This weekend has brought some good news around tariffs on computers and phones, but the broader trade war rages on, and there’s no guarantee that tomorrow won’t bring another bombshell. Keep going, hold steady.

This year I’m hoping to write a bit more about what constitutes a quality equity investment, explaining what I mean when I say you should be looking to invest in high quality, lower risk stocks. I have found that focusing on corporate fundamentals is the best way to avoid getting sucked into speculation and political debates (and I’ve been guilty of this).

Remember: market volatility brings with it opportunity. The lowest risk time to invest, counterintuitively, is when perceptions of risk are at their highest.