“Did you see how much the market was off today?” Osahon asked as I was reading through some market information on the net.
“Yes. Maybe the most anticipated bottom out is finally materializing,” I replied.
“I sure hope so,” said Osahon. “I am presently sitting on cash and I’m ready to make my move.”
“How long have you been in cash?” I asked.
“Since February,” said Osahon.
“When do you plan on getting in?” I asked.
“Once the market is off 10 percent from its present level, I’m putting my finger on the trigger. Then I’m going to keep an eye on things and make my move when it feels right.”
“Good luck with that. And let me know when you make your move,” I said, turning my attention back to my laptop.
I truly hope Osahon makes the right call and gets in at the right time. But I doubt that he will. Most investors don’t.
Why didn’t Osahon get out of the market sooner? Simple. Loss aversion. Behavioral scientists have demonstrated many times that people will go to extraordinary lengths to avoid feelings of regret. How far will they go?
So why did Osahon ride the market almost all the way to the bottom? Emotionally, he couldn’t take on a loss until he was overcome with fear. Logic played no part in his bailout decision in February.
And my guess is logic will play no part in his re-entry scheme.
Let’s say the NSE drops below the present level – which is beyond Osahon’s 10 percent threshold. Will Osahon invest then? I doubt it. He’ll worry that the market will head lower, and loss aversion will prevent him from making a move. Should the market actually head lower, the cycle will repeat itself.
In all likelihood, Osahon will commit his money to the market when all the economic forecasts are good and it feels safe. That’s called a market top.
The fact is, buying high and selling low feels natural for most people. But you have to override your instincts and let logic, not emotions, dictate your actions.
Commit one-twelfth of your cash to equities and pick a day to invest that money this month. Invest another one-twelfth of your cash on that same day every month for the next 11 months – regardless of what’s going on in the markets.
This is called “Naira cost averaging.” Here is an oversimplified illustration of how it works:
Let’s say you commit N10,000 a month to an investment in XYZ company. The stock is trading at N5 a share in month one, so you buy 2000 shares. The next month, the stock trades for N10 a share, so you buy 1000 shares. In the third month, the stock falls to N7.50 a share, so you buy 1333 shares.
So now you have invested N30,000 and own 4333 shares of XYZ. At N7.50 a share, your investment is currently worth N32,497.5. You’ve made over 7 percent. Can you see how investing this way takes your emotions out of the equation?
Where do I invest? You may want to ask. My advice remains the same: favour stocks with healthy (and growing) dividends, add high-quality corporate bonds to your asset mix and diversify your portfolio.
Invest Safely.
Do you have any question concerning investment, how you can join investment club, buying shares, dividend, share certificate, stockbrokers, registrars, you want answers to? Send your questions via text to or call 08058767059. Email: amadasunese@nigerianobservernews.com. All questions will be treated comprehensively on this page.
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