It’s never ‘different this time’

"He is credited with warning that the words "It’s different this time" were the most expensive in the English language," said the Financial Times.

The article was referring to what is sometimes said during share market booms. And I well remember in the late 1990s that many people said international share prices were rising really fast because of a "paradigm shift". Computers and the internet had transformed the way everyone does business, they said, and so the exuberance was justified. There would be no crash to follow.

A few years later, early this decade, they were proven horribly wrong.

It’s worth noting, though, that the same could be said for the current market downturn. Some are saying that it, too, is "different this time" - that for various reasons shares won't recover. If Templeton were still around, I'm confident he would be telling us to hang about for a while.

In every boom and bust, there are new factors. But the markets always turn the other way eventually.

That's why it's a pity to hear of people pulling out of investments in shares or share funds – including KiwiSaver funds that hold shares - because prices have fallen. While nobody knows whether prices will continue to fall for some time yet, or whether we are in for a plateau period or a return to boom times, the wise investor keeps putting money into the share market regardless.

Before we go further, I should note that most people should invest in shares or share funds only if they don't expect to spend the money for at least ten years. If you want to use the money sooner than that, there's too big a chance the market will be down then.

But if you have a decade or more in hand, you can be pretty confident there will be time to recover from even a major slump. And chances are high that you will do considerably better investing in shares or a share fund than in more conservative options.

So how to cope with market volatility? It's easy. Just set up automatic payments of the same amount – weekly, monthy or whatever – into your investment. If you are an employee in KiwiSaver, this will happen anyway, with investments coming out of your pay.

There are two advantages to this:

• You don’t have to think about it, or worry about your timing. Given that even the professionals often get market timing wrong, it's silly for an amateur to even try.

• You gain from what is confusingly called "dollar cost averaging." This happens automatically if you drip feed a regular amount into an investment.

For example: Let's say you invest $100 a month in a share fund that uses units, as many do. If the market is down, the units might be worth $10 each, so you'll buy 10 units in a month.

A few years later, the market has risen and the units are worth $20 each. So in that month your $100 will buy only 5 units.

The average market price for the two months is halfway between $10 and $20, which is $15. But you have bought twice as many $10 units as $20 units. So your average price is lower than $15 – actually $13.33.

Without having to know anything about the share market cycle, you've bought more when shares are cheap, and fewer when they are expensive. Nice!