Entering an Investment

How do you prefer to enter an investment?  Have you ever stopped to think about it?  While most folks never deviate from the “enter all at once” approach, other methods of investment entry most certainly exist.

Understanding the alternative methods of investment entry may prove beneficial from time-to-time.  This is especially true when dealing with “managed” investments (professionally managed investment vehicles such as mutual funds, hedge funds, etc.).

While entering a managed investment seems simple, the process can become overly complicated for some.  In America, it’s in our nature to want to buy when prices are low.  However, it’s possible to become so consumed with buying the lowest price that you miss the investment opportunity altogether. 

There are several ways to enter an investment.  Here’s an explanation of three:

Commit All At One Time

For many, the best approach to entering a managed investment is merely to make the decision and commit all of your funds at one time.  As we will discuss in a moment, there are ways to “put your toe in the water” (easing your way into the investment by committing smaller amounts over time).  However, if other methods seem to complex or bothersome, you can take the direct approach and make a single purchase to enter the investment.

Test The Water

Some folks are simply more comfortable when they test the water before jumping in. When investing, testing the water can be accomplished by committing a portion of your capital initially, and the remainder over time.  Exactly how much of your capital you invest and when you invest it is your decision. 

A couple of the “test the water” techniques people are familiar with are Dollar Cost Averaging and “Price-Based” Investment Entry.

The Delayed “Swan Dive”

There is one other investment entry technique many investors ultimately resort too - the "delayed swan dive".  Here’s how it works…

Presented with an interesting investment opportunity, an investor chooses to do nothing.  With his hands in his pockets (and his investment capital still in the bank), he then becomes a very interested spectator.  For a period of time, he watches the performance of the investment—all the while hoping that it loses money (losses would, of course, bring confirmation to his decision to not invest).  Rather than seeing losses however, the investment generates profits.  Naturally, this leads to frustration over his decision to “just watch it for a while”.  At some point down the road, his frustration becomes too much.  That leads to the “swan dive” (with ears pinned back, committing all of his capital without any additional consideration).

Often, the delayed swan dive technique is something to avoid.  If you initially believe the investment has merit (favorable risk/reward parameters, favorable past performance, etc.), a better approach may be to employ one of the “test the water” techniques.  Should the investor make a small commitment initially  and the investment fails to perform, his risk exposure is minimal.  On the other hand, if the investment begins to generate profits it’s less likely that he will experience the frustration that can lead to the swan dive.

Different Strokes

The relative benefits of each type of investment entry strategy will vary.  There are variables that must be considered in the equation – the amounts that you invest, the time periods you select to make the investments and the performance of the investment during the time you’re implementing your entry strategy.  Each of these variables will impact the end result.   You can make things as simple or as complicated as you like.

Considering the totality of the question, what’s the the best way to enter a managed investment?  The best way is the way that’s best for you. Of course, that best-way is determined by your individual temperament and psychological make-up.  If you feel a need to buy low (so that you won’t experience buyer’s remorse if prices fall after your investment purchase), a dollar-cost or price-based method may be best. On the other hand, if you’re prone to indecision and thus a “test the water” approach may only makes things worse, it may be best to make a single purchase and move on.