There are times when it is easy to invest, and times when it is easier to stay on the sidelines. Ironically, what is easy in investing often associates with “wrong” or “suboptimal.” Investing is a battle between what is financially beneficial and what is psychologically desirable. They are often at odds with each other.
During volatile times, particularly when the market has lost money, investors may prefer to stay out of the game, and they “wait and see.” The “wait and see” approach can be very beneficial, but not in the way most investors use it.
When ‘Wait and See’ is Wrong
If an investor says, “I’m going to wait and see” the odds are they are using it at the wrong time. This phrase is commonly used by investors who have cash savings – whether that is due to an inheritance, bonus, or the result of selling stocks.
Psychologically, the “wait and see” is pacifying. Staying on the sidelines keeps the investor “safe” from the ups and downs of the market. Financially, “wait and see” can significantly impact future results.
Many investors are focused on the today and tomorrow. They are too worried about the next 20% move and not worried enough about missing the next 100% move. The reality is that many investors who go to cash end up missing out on significant gains. Markets sometimes turn fast (as they did in the Spring of 2020). There is no bell that signals a bottom and the bottom is only obvious in hindsight. The bottom is often identified months down the road, and typically after the market has gone up a lot.
A Better Approach When Times are Tough
A much better strategy to “wait and see” when times are psychologically tough is to “jump and ignore.” In other words, investors would be better off creating a plan that allows them to participate in the markets “jump”, and then don’t look at the markets for a while “ignore.”
This “jump” could occur in two ways: one would be to simply invest all the money in a long-term strategy. This may be difficult for many investors. A psychologically easier way to “jump” would be to enter the market step-by-step, using a systematic investment plan they commit to.
When ‘Wait and See’ is Right
The “wait and see” approach is a fantastic strategy for someone who is fully invested in their strategy. Perhaps the losses and volatility concern them. Maybe they are considering going to cash. In this case, the best advice would be to “wait and see.”
Let’s wait and see when the markets recover. Let’s wait and see how much more patience and discipline we are going to need to exercise. Let’s wait and see how much the market goes up before the news becomes better. Let’s wait and see how fast the markets recover and how far they go before the next downturn. You get the idea.
Investors love to procrastinate when in cash. When in reality they should procrastinate their decisions when fully invested. So, the “wait and see” strategy isn’t bad at all. It is just being used by most investors at the wrong time.