When is the right time to buy stocks?

Emma Wall  |  29/03/2017Text size  Decrease  Increase  |  

Emma Wall: Hello, and welcome to Morningstar. I am Emma Wall and I am joined today by Chris Davis to talk about US equities.

Hello, Chris.

Christopher Davis: Hello, Emma.

Wall: So you've done a lot of work about investor philosophy, investor sentiment and how people tend to buy atop and unfortunately sell at the bottom. How does this concept relate to the current market conditions, because we have had significant rally in US equities?

Davis: Well, what's interesting is of course as it was recently characterised this is one of the most hated rallies in US equity history. People seem to be looking for excuses not to invest. When stocks were down and were cheap, nobody wanted to invest because they hated stocks, memories of the financial crisis. Stocks have come back, they don't want to invest because of uncertainty.

My grandfather had a great expression. He said the best time to invest is when you have the money. And the way you smooth out the gyrations and the fear of the correction that's inevitable the timing is uncertain but that there will be a 20 per cent correction is certain. Simply by spreading out the decision over time. I think people that are anxious and worried about valuations of the market should simply get started because valuations on cash and bonds is way worst.

Wall: I suppose it also depends on your time horizon because if you need the money in six months' time perhaps investing in US stocks is not the best idea because of that uncertainty element. However, if you have a 10-year time horizon the bumps along the way are less of a big deal?

Davis: Absolutely, and spreading out the decision, and that's the key. And it's not just for individual investors. So many institutions would perform better if they simply made the allocation decisions more gradually. So if somebody--if my own mother wants to get into stocks what I tend to tell her is start immediately do 5 per cent today, do 5 per cent next quarter or next month depending how long you want to spread it out but 5 per cent a quarter gets you fully invested over five years and it takes all of that anxiousness about the timing away and it allows the growth underlying to be the driver of your return.

Wall: Do you feel that it should be automated in some way because 5 per cent a quarter sounds easy from where I am sitting today when the market has done so well, despite the fact that there has been such a hated rally. But as soon as that correction comes in behavioural finance teaches us that you won't want to put that 5 per cent in.

Davis: Of course, this is the area where automating you know whatever you can do in a sense to automate that decision to take away the stress of the daily decision this is the reason why 401(k) investors [personal pension investors] have done so well. They bought right through the financial crisis the sort of deliberate constant--the apathy you know not looking at the statement is an enormous advantage provided you've made the right allocation to begin with. Of course what's happened for some 401(k) investors is they just sit in cash straight through and then that undermines the strength of it.

But if you set a 401(k) plan to just put a certain amount into equities each month, each paycheck that is almost guaranteed to produce a good return over time. And I say that not based on my own knowledge, but Ben Graham wrote that back in the 1930s. He said a systematic approach to investing is almost certain to work out, no matter when somebody starts provided that it's adhered to conscientiously and courageously. And the best way to do that is to automate it.

Wall: Chris, thank you very much.

Davis: Thank you so much.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

Video Archive...

When should you pay active fund fees?
23/05/2017  When is it worth paying higher fund fees for active fund management? The single most important factor effecting a fund's relative performance is its price.
Budget 2017: bank levy a potential 4pc hit to big five profits, dividends
10/05/2017  If unable to pass on costs associated with the new levy proposed in the Budget, bank profits and dividends could dive 4 to 5 per cent, in a significant hit to shareholders and customers.
Why PIMCO Australian Bond is a Gold-rated strategy
10/05/2017  Tim Wong explains why PIMCO Australian Bond is Morningstar's most highly rated fixed-interest strategy in this market.
2 leisure stocks weather Cyclone Debbie, Dreamworld fallout
02/05/2017  These two companies with large theme park operations have faced significant challenges in recent times. Morningstar senior equity analyst Brian Han explains how they've fared.
Schroders stays hot on commodities, cooler on tech and defensives
01/05/2017  Long-term investors in Australian shares will continue to find value, but the time for risk-taking on more speculative plays has passed, says Martin Conlon, Schroders’ head of Australian equities
Introducing star ratings to Morningstar Australasia equity research
27/04/2017  What investors can expect from Morningstar's roll-out of its star rating methodology across Australian and New Zealand stocks, as explained by the regional director of equity research, Adam Fleck.
French elections: Macron versus Le Pen
26/04/2017  Following the first round of the French Presidential elections, the 7 May vote is now between Emmanuel Macron and Marine Le Pen. What does it mean for investors?
How climate change will impact your portfolio
20/04/2017  Ignore climate change at your portfolio's peril, says Jeremy Grantham, founder of asset manager GMO.
How dwindling resources will push up commodity prices
13/04/2017  Jeremy Grantham, renowned investor and founder of GMO, explains how a growing population is putting a strain on global resources.
How retirement spending affects withdrawal rates
10/04/2017  Data shows that the withdrawal rate gets higher as spending decreases in retirement, says Michael Kitces, a US-based financial planning expert.
What lies ahead for mining and materials
10/04/2017  Iron ore, coal, lithium, and uranium: some end-markets will rise and others will fall behind, says Morningstar commodities and resources analyst David Wang.
The evolution of multi-asset investing
07/04/2017  More difficult market conditions in a rising interest rate environment highlight the value of active management across your portfolio, says Simon Doyle, Schroders' head of fixed income and multi-asset.
When is the right time to buy stocks?
29/03/2017  Davis' Associates Chris Davis says the best time to invest is when you have the money, and to ignore market "noise".
How misinterpreting risk impacts financial returns
28/03/2017  Dr Gerd Gigerenzer says fund providers need to invest in education so that savers are better equipped to deal with risk--and can make better financial decisions.
Are European stocks overvalued?
27/03/2017  Isabel Levy of French asset manager Metropole Gestion explains how she uses fundamental industrial analysis to avoid value traps and identify the fair value of European equities.
Which funds are worth paying for?
23/03/2017  High active share funds--that is, those managers who take off-benchmark bets--outperform those which are low active share. So, ban closet trackers from your portfolio.
Bond market wobbles no cause for panic
21/03/2017  Australian bonds see only a slight tremor in response to the Fed's rate rise, says John Likos, Morningstar's senior credit analyst, who also provides insights on the new, and anticipated, hybrids from Australian banks.
ESG: Essential steps for successful long-term investing
21/03/2017  Want sustainable long-term returns? Morningstar UK reveals the essential components and the fund providers who are getting it right.
Few values left in global stock market
20/03/2017  Morningstar's directors of equity research think investors need to be cautious in the market today and offer some of their best investment ideas.
Why the time is right to invest in emerging markets
20/03/2017  Hilde Jenssen from Norwegian fund manager Skagen admits that emerging markets have disappointed investors over the past three years--but says valuations are attractive and reforms are boosting returns.