Waiting for your next Salary to invest? Are you over stretching yourself?

I last blogged about pacing yourself during a buffet. Buffet here refers to a stock market correction, not the food buffet. 

Now, so how exactly do you pace yourself?

Have you heard of people saying:

"Waiting for my next pay / bonus to arrive to invest!"

"No more ammo left after averaging down"

"I down to my final 10% war chest, if it continues to fall I'll just hold on tight"

I sure hope when they say all these, they've set aside a sum of emergency fund.

And in the recent weeks, the STI Index has only follow 3-4% from its peak. It isn't even a "technical correction" (> 10%). At a trailing P/E of 14 now, this stands slightly below the average PE (from 1993 to 2012) of 16.6.

So why are people saying these? Are they over stretching themselves? Over zealous in investing? Are they pacing themselves properly?

It depends. Different people have different investment styles.

I, however, like to prepare for a hurricane instead of showing hand during a normal rainy day.

That's not to say I encourage having a huge stash of cash set aside for war chest. 

Referring to fool's article again, it suggests fellow investors to pace themselves during corrections.

Setting aside war chests depends on the absolute amount in question. 

If setting aside 20% of war chest means it setting aside $20,000 versus setting aside 10% meaning setting aside $100,000 it differs a lot.

But if setting aside war chest of 10-20% means setting aside only $20k, then utilisation of that war chest matters a lot more.

If at the current market, we open the war chest and start using $5k out of the $20k (i.e. 25%). So what happens when the market later falls by 10%, do we then use another $10k to accumulate a blue chip?

That's half of the war chest utilised.

I like to remind myself the size of the war chest I have, and how many times can I buy with it on every activation?

During a 20% correction, it is most likely I'll dip into our local banks. The minimal amount needed per lot is about $1,000 (OCBC) to $2,000 (DBS, UOB). If I start getting excited at a 3% drop and accumulate 1 lot of DBS, I've effectively used 1 out of the 10 chances I have with my war chest.

That's not to say I'm encouraging timing the market. I believe we can never fully time the market. But opening that war chest and utilising it should be cautioned, taking into account the 

1. Absolute size of it
2. Your utilisation plan and 
3. Sticking to the plan

The hardest would always be sticking to the plan. We tend to get excited or chicken out (yup, both happens) when the broader market falls like no other.

However, always remember to stick to the plan. Everyone's plan will be different, suiting to each needs and style.