When is the right time to buy stocks?

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

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...

Did lack of transparency cause the financial crisis?
19/09/2017  Ten years after the collapse of Northern Rock, Andy Agathangelou tells Emma Wall that greater transparency in financial services could ward off a second global financial crisis.
Are we facing another Global Financial Crisis?
19/09/2017  Ten years on from the collapse of Northern Rock, Dan Kemp tells Emma Wall how there are echoes of the crisis in markets today.
Wild ride in FY17 and more to come - part 2
13/09/2017  Morningstar's Peter Warnes discusses how you may want to position your portfolio in FY18, as geopolitical storms continue to rage and safe-haven assets feel the effects.
Wild ride in FY17 and more to come - part 1
12/09/2017  Cost-out remained a dominant theme for large-cap Australian companies in FY17, and looking ahead to FY18, they should be clearer on cap-ex, says Peter Warnes, Morningstar’s head of equities research – Australasia.
Deeper demand driving these pooled investments
31/08/2017  Listed investment trusts are beginning to take off in Australia, but exactly what are they and how do they differ from listed investment companies and managed funds?
Upbeat Woolies result tempered by Big W
30/08/2017  Woolworths' category-topping FY17 result driven by surprisingly strong sales, even as sector faces tougher times ahead, explains Morningstar's Johannes Faul.
Coke Amatil 1H17 result leaves margin of safety
28/08/2017  A challenged earnings announcement from Coca-Cola's Australian-listed business was largely expected, but downside is already priced in and improvements are expected in FY18.
How slashed Telstra dividend affects our outlook
23/08/2017  Brian Han remains reasonably positive on the telco giant even after some disappointments in the FY17 earnings announcement.
Earnings season FY17 mixed bag so far
18/08/2017  Aside from a few high-profile earnings guidance misses, large-cap stocks are doing okay as FY17 reporting season passes halfway, says AMP chief economist Shane Oliver.
Rio Tinto posts mixed result for 1H17
10/08/2017  An interim result of US$3.9 billion in net profits after tax for one of the world's largest mining companies was positive but slightly weaker than expected, even alongside a record dividend, explains Morningstar's Mat Hodge.
Kerr Neilson on why global investment exposure is key
07/08/2017  There are two types of investors, regardless of market noise, imputation credits, diversification approaches and market indices, says the managing director of Platinum Asset Management.
Finding fixed income opportunities in new paradigm
02/08/2017  Slowing economic growth in the US and parts of Europe emphasises the need to carefully select credit opportunities, says Vincent Reinhart, chief economist, Standish Mellon Asset Management.
Telstra won't be blown away by headwinds
17/07/2017  While it faces what Morningstar equity analyst Brian Han describes as a whirlwind of negatives, he suggests investors shouldn’t hang up on Telstra.
The home-truths of investing
12/07/2017  Look for companies that sit outside the cycle; heed the lessons of history; and remember the power of compounding, says Bennelong's Neale Goldston-Morris.
Self-managed super is not Do-it-yourself
03/07/2017  There are a few common pitfalls in running a self-managed super fund that mean trustees shouldn't go it alone entirely, says BT Financial Group's head of financial literacy, Bryan Ashenden.
Investing to protect on the downside
30/06/2017  There are investment strategies you can adopt to mitigate volatility-linked fear and uncertainty in markets, explains Roy Maslen, chief investment officer – Australian equities, AllianceBernstein.
Don’t overdo benchmark consideration
28/06/2017  Being benchmark agnostic is the most effective approach to fixed income investing, according to Anujeet Sareen, portfolio manager, Brandywine Global.
Factor-based investing using ETFs
26/06/2017  Investors should consider style-exposures--such as value, defensive or yield-- they would like in their portfolios, explains Jonathan Shead, head of portfolio strategists – Asia Pacific, State Street Global Advisors
Volatility plays to active manager strengths
--  The climate of political volatility in the US holds important implications for investors and the funds they invest in, particularly around Donald Trump's ability to pass legislation through Congress, says Pimco's Libby Cantrill.
Is the FTSE 100 Facing Another Market Crash?
16/06/2017  Ten years on from the pre-crisis FTSE 100 high, Morningstar UK's Emma Wall examines how UK stocks have fared