It’s just a phase I’m going through

Nervous about markets? It might be time to phase.

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Ian Millward
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Phasing (or, to give it it’s proper name, pound cost averaging) simply means drip feeding your money in to markets over a period of time, typically 12 months. The alternative being to invest as a lump sun on a single day.

The logic is that you reduce the impact of a sudden crash on your money versus lump sum investing. In this scenario the value of money already invested would fall, but any new money would now be buying at a lower price.

This is only relevant when investing new money. Sometimes when people sell an investment, they want to then ‘phase’ the money back into a different investment. But that isn’t really phasing at all, more a market timing decision, as they are taking money out of the market and delaying putting it back in. Phasing is about how you commit cash – money that was not at risk of market falls and now will be.

Opting to phase is by no means a given. Generally, it is a decision that is more likely to cost you money than make it. Stock markets tend to rise over time. Yes, we know they’re volatile and will suffer falls, but the trend is upwards – otherwise why bother investing at all. History suggests it’s more likely you’ll buy more expensive units as prices rise.

But it is something we always discuss. Whilst no-one knows whether phasing will work in your favour, it can help deal with emotion. For someone nervous about investing, phasing provides a way to dip their toes in the water and gradually let the rest follow. A bit like jumping in a pool; the getting in is the usually the hardest part. Once people are invested, they tend to deal with it.

So, the benefits are almost certainly emotional and potentially financial, depending on how markets move.

And if you are phasing, should you ever amend the plan?

In our view, yes. When markets tumble, we discuss with clients who are phasing whether they wish to accelerate the process. Whilst their first instinct might be to run for cover significant falls can present a good buying opportunity, so should be considered.

We don’t force anybody’s hand and never forget whose money it is. We just make sure the plan is still appropriate based on the changing circumstances and that the client is comfortable.

Our one red flag is someone wanting to stop regular phasing contributions after a market fall and ‘wait for a better time’. This defeats the object of the phasing, as it means they are only happy to buy when markets are rising, by which time they will probably have missed (some/much) of the boat.

Understanding human nature is a key part to being a good adviser, how two people think and react to identical events can be completely different.

And we think that’s one of the keys to building a special business. It is not one size fits all. It is about never losing sight of the trust people have placed in us and doing our very best to make sure that the plan and approach we put in place for them is the right one … for them.

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