Investing basics: the hardest decision in investing

--  |   08/05/2020 Text size  Decrease  Increase   |  
email_fwd
<p><strong>Ruth Saldanha: </strong>For many investors, the steep downturn of March and April this year brought back bad memories of 2008. To avoid getting more burnt than they already had been, several investors fled to cash, exiting their equity portfolios to safeguard them from further losses. But is now the time to get back into equities. The Chief Investment Officer of Steadyhand Investment Funds, Tom Bradley has called this decision of when to get back into the market after you get out the hardest decision in investing. He is here today to talk about why. Tom, thank you so much for being here today.<br /><br /><strong>Tom Bradley: </strong>Thanks for having me, Ruth.<br /><br /><strong>Saldanha: </strong>First up, does panic selling ever work? Put another way for individual investors, does it ever pay to go with your gut?<br /><br /><strong>Bradley: </strong>Well, I know some pretty savvy investors and &ndash; who have a pretty good gut. But for the vast majority of investing the gut &ndash; you going with your gut does not work indeed. And indeed, investors like me have taken Warren Buffett's lead, and we actually trade against the average investors gut. And what I mean by that is, you'll remember Warren's great comment about it's time to be &ndash; "be fearful when everybody is greedy, and greedy when everybody is fearful." And that is exactly speaking to the fact that generally, when times get tough, stocks are down. <br /><br />The gut that we're talking about is actually churning. And the easiest way to relieve that pain is to do something like sell out. So, yes, it can work for sure. But I think what makes it so hard and why I call it the hardest decision is not the first decision to sell, it's the second one and it's only successful strategy if you get both decisions, relatively correct. And we'll talk about that for sure. But I should say that this isn't just sort of an imaginary issue BlackRock did some research late in the cycle, the last cycle, we had '09 to call it to '19. And their research showed that Canadians on average had over half of their retirement assets in cash or cash like instruments. So, BGICs and things like that. Many, many Canadians missed the last bull market because they were so scarred by what happened in '08, '09. And so, this is a very real issue out there for investors.<br /><br /><strong>Saldanha: </strong>And is that the reason that this decision is perhaps the hardest one investors will make?<br /><br /><strong>Bradley: </strong>You know, there is lots of reasons, I'll give you three. First of all, if you think about going from, you know, an average investor goes from a balanced portfolio all to cash they are so far from their long-term plan, farther than they've probably ever been. And so, the stakes are really high. Now, they'll sleep better for a few nights because their portfolio won't be bouncing around. But one of those mornings they're going to wake up, and they're going to realize they have a huge decision because they're so far away from where they should be. So, I think, you know, if you think about trying to put the puck in the net or write an exam, when the pressure is really on, that tends to lead to poor decisions. And so, I think the fact that the stakes are so high, you're so far away from where you should be is one of the problems.<br /><br />The other one is that you get &ndash; in our society, we get constant reinforcement as to why it's the right thing to be out of the market. The media machine is generally biased towards negative news, the headlines are negative, Page 8 might be positive. And so, there is always something feeding your view that you should stay out of the market and in my observation, it makes it very hard for people to turn around and go the other way.<br /><br />The third thing I'd mention, and it doesn't always happen, but think about the cases where you sell out and you're wrong. The market, for instance, last month say you sold out in late March, here we are in &ndash; heading in &ndash; further into the spring, and markets are back up. And, boy, that makes it really tough to get back in because you're so worried about, you've made a bad decision already, and you're worried about whipsawing. So, I think there is just all kinds of things that make it behaviorally. As I say, the toughest decision in investing.<br /><br /><strong>Saldanha: </strong>Well, the fear that accompanies these market crashes is understandable. How should investors prepare psychologically to venture into equities and face those volatility again? And are there any investment tips that could perhaps make it easier?<br /><br /><strong>Bradley: </strong>You know, it's the $64,000 question, Ruth, I think about this a lot because I do study investor behavior, and I think the main thing is somebody has to, you know, after they get out and things have settled, they need to sit down and think about &ndash; go back to square one, what is the purpose of the money. If the money is for a vacation or a college tuition or whatever, that's fine, keep it in cash. But if it is to fund a retirement over 10, 20, 30 years, then they need to figure out what that should look like. So, I think that's number one. Maybe one of the easiest little cues to help get people in us to think about investing only the money that you're going to need in 20 years. Forget about even 10 years, even though that's pretty long term. Think about the money that's longer term, because you should certainly be able to handle the volatility for that kind of money.<br /><br />The other thing I'd say, and this is maybe a plug-in for Morningstar, but I think people, I often offer them a long-term, even a 100 year chart of stocks, to show them that that chart goes up and to the right and the crash in '87, the tech wreck, the financial crisis of '08, '09 and now the COVID crisis all as you look longer and longer term look more insignificant in the scheme of things. And so, I don't have an easy answer for that one, Ruth, I think you almost got to trick yourself behaviorally, but you do need to go at it.<br /><br /><strong>Saldanha: </strong>Finally, what are some of the ways to safeguard a portfolio from volatility?<br /><br /><strong>Bradley: </strong>Ruth, you can't avoid volatility in these times. You know, Ruth, all kidding aside, you know, rates are &ndash; interest rates are where they are we &ndash; you know, our parents talked about the day when they could buy a bond and they earned a 3 per cent or 4 per cent real return after inflation and they didn't have to worry about stocks. That isn't the case today. Fixed income investments safety in the sense is very expensive, so you're losing ground to inflation. So, I don't think you can totally avoid it even as retired. I think, number one, you need to accept that your portfolio &ndash; at least part of your portfolio is going to bounce around a little bit. Prepare for it both mentally, but also cash flow wise if you're &ndash; certainly if you're retired, make sure you have a spending reserve set aside so that some of &ndash; the rest of your portfolio can bounce around.<br /><br />And then I think the biggest dial that we all have on our dashboard, as far as dealing with volatility is asset mix. So, if you can't stomach the asset mix or the volatility that goes with really aggressive portfolios, then you dial it down on less stocks, on less high yield, on more secure investments like GICs, government bonds, et cetera. So, no easy answer there. And we all have to accept some volatility in our investing approach, but the asset mix is the way to kind of dial it up or down.<br /><br /><strong>Saldanha: </strong>Thank you so much for joining us with your perspectives, Tom.<br /><br /><strong>Bradley: </strong>Thanks, Ruth.<br /><br /><strong>Saldanha: </strong>For Morningstar, I'm Ruth Saldanha.</p>

Video Archive...

Hunker down but the turn isn't far away: Schroders' Simon Doyle
24/06/2022  "I think over the next sort of, three, six, nine months, we're going to see some pretty good opportunities emerge, and I think investors who are well prepared will be able to take advantage of that."
Miners not yet cheap: Morningstar explains the iron ore rout
23/06/2022  Policy will continue to fuel short-term price movements but the long-term fundamentals for Australia's biggest export look shaky.
Anton Tagliaferro on companies to weather the market storm
17/06/2022  The founder of Investors Mutual is cool on Australia's banking giants.
Why are banks selling off as rates rise? Morningstar explains
15/06/2022  Faster interest rate hikes from the Reserve Bank have markets worried about bad debts, says Morningstar banking analyst Nathan Zaia.
"Real chance we've broken the system as it was": Platinum backs regime change
14/06/2022  Highly likely investors are on the cusp of an era of permanently higher rates that should favour "real-world companies", says Andrew Clifford, co-chief investment officer at Platinum Asset Management.
"Get defensive": Warnes on where and when to put cash to work
14/06/2022  Build cash and prepare for opportunistic nibbles at companies such as Aurizon, Wesfarmers and James Hardie, says Morningstar's head of equity research.
"I'm still nervous": Peter Warnes on the outlook for equities
10/06/2022  We haven't seen the bottom of the bear market yet, says Morningstar's head of equity research.
From nosebleed to reason: US tech valuations looking attractive
01/06/2022  Earnings growth remains market leading for wide moat stocks like Alphabet, Meta Platforms and Amazon.
Will the election dampen the Australian resource sector?
30/05/2022  Labor looks set to proceed incrementally and existing producers such as Whitehaven Coal could even benefit should more radical policy be proposed.
'We don't learn': Morningstar sits with King Nudge Richard Thaler
25/05/2022  The Nobel prize winner who cameo'd alongside Selena Gomez in Hollywood hit The Big Short  discusses the latest developments in behavioural economics.
Why are Coles, Woolworths and JB Hi-Fi tanking? Morningstar explains
19/05/2022  Local investors were spooked after US retail giants Target and Walmart plummeted overnight as rising prices hit margins and inventory.
Dan Kemp's best tip for successful long-term investing: Beware market narratives
19/05/2022  On his recent visit to Australia, Morningstar's global chief investment officer Dan Kemp talks investing narratives, confronting the growing list of reasons to be concerned about markets and sustainable investing.
What's driving the latest big drop in US stocks?
19/05/2022  Worries about inflation’s toll on earnings sparks Wednesday’s 4% plunge, but stocks are now far undervalued.
Value strikes back: How to manage style in your portfolio
18/05/2022  One of the big themes of the year has been the value comeback. What is behind this resurgence after a pretty dismal period, and should your portfolio be tilting in its direction?
Is it time to recession-proof your portfolio?
11/05/2022  Here's what investors who are worried about a recession should consider today.
Morningstar Best Ideas List: An undervalued play in telecom
11/05/2022  Morningstar analysts have identified TPG telecom as the most undervalued telecom stocks in the ASX 200 detailing multiple catalysts for earnings recovery and growth.
Bill Browder: A scared Putin will only escalate the conflict
29/04/2022  Exclusive: Hermitage Capital Management CEO Bill Browder talks Putin, Russia, and the next six months for Ukraine
5 risks facing the US market right now
28/04/2022  Inflation, rising interest rates, geopolitical risks, and other things to keep your eye on.
Buffett and Berkshire in 2022
27/04/2022  Morningstar's analyst talks about the Buffett's recent deals, what the stock is worth, and whether Berkshire will pay a dividend any time soon.
Fair value upgrades on the table: Morningstar resources update
31/03/2022  Supply disruptions following Russia's invasion of Ukraine are forcing analysts to consider the possibility elevated prices persist.
Bank outperformance speaks to positive trajectory: Morningstar
30/03/2022  Rising interest rates, strong economic growth and cheaper valuations are driving banking stocks ahead of the broader market.
Stock vs stock: Netflix and Disney
28/03/2022  Where are entertainment and streaming services headed?
Morningstar Best Ideas List: WiseTech looks cheap after tech selloff
24/03/2022  Problems in global supply chains are an opportunity for WiseTech as its logistics company customers move to replace old software.
First fires, then floods: How listed insurers are weathering extreme events
23/03/2022  Markets focused on floods and bushfires are missing how insurers are cutting costs, doing more digitally and are looking down the barrel of a lift in investment income.
Don't get 'whipsawed' by false promises of peace in Europe
17/03/2022  Morningstar Investment Management's global CIO Dan Kemp explains why well-intentioned investors desperate for peace in Europe are making dangerous market calls
Morningstar Best Ideas List: Kogan to hold own in faceoff with Amazon
15/03/2022  Knowledge of the local market, strong branding and a growing subscription service should see the undervalued retailer retain market share in the rapidly growing online sales category, says Roy Van Keulen.
"There's been a big rotation in markets": Value surges as growth stumbles
08/03/2022  Higher inflation, rising interest rates and booming commodity markets are driving a major rotation away from the post-pandemic winners, says Tim Murphy, Morningstar director of manager selection.
Afterpay's rivals set for battle with rates and regulators
03/03/2022  Regulators are likely to be less lenient now the buy-now-pay-later sector is part of the fabric of Australian payments.
Industry champions on the cheap: Emerging markets at the Morningstar Investment Conference
23/02/2022  Strong commodity prices, cheap valuations and a head start on interest rate hikes means emerging markets are set for strength, says Dr. Joseph Lai of Ox Capital.
The Russia crisis is heating up, but you need to stay cool
23/02/2022  A belligerent speech from a president signalled the start of the latest phase of Russian agression last night, causing markets to wobble and investors to wonder.
Peter Warnes on FAANGs, investing in Asia and bond market smoke signals
15/02/2022  In an extended interview, Morningstar's Peter Warnes discusses the bear market in US technology stocks, interest rates and growth and his approach to investing outside the US and Australia.
Weighing up Magellan Financial Group after Douglass surprise exit
13/02/2022  Morningstar equity analyst Shaun Ler explains why he see valuation upside high for MFG even as shares lose steam.
Year of the Tiger: What's next for Chinese stocks
31/01/2022  The Chinese lunar year is almost over, and what a ride it's been. Morningstar speaks to JPMorgan Asset Management strategist Mike Bell about what's ahead. 
What to do (and not do) in a volatile market
23/01/2022  Christine Benz discusses how investors should handle the turmoil, whatever the life stage.
Bare shelves only a short-term hit to Coles and Woolies
18/01/2022  Empty shelves will negatively impact supermarkets in the second half of fiscal 2022 but the impact on long-term earnings is minimal, says Morningstar analyst Johannes Faul. 
Morningstar's outlook for 2022
17/01/2022  Bank earnings, house prices and China risk: Our experts and analysts discuss what they've got their eyes on in 2022.
Morningstar's Year in Review 2021
24/12/2021  Our experts and analysts weigh in on what mattered for investors last year.
"A bump in the road" as Magellan loses major client
21/12/2021  New products, lower fees and a portfolio of undervalued stocks set to help the fund manager right the ship. 
What role should Bitcoin play in your portfolio?
10/12/2021  And how does it match up against gold?
Years of demand remain for Australian coal producers
10/12/2021  Australian miners to be among the last standing as coal use fades.
Year-end portfolio rebalancing: What you need to know
08/12/2021  Rebalancing your portfolio is one of those beneficial habits that’s easy to let slide. But year-end is an ideal time to check how your portfolio is tracking against your target asset allocation. 
3 quality names from Stewart Investors
03/12/2021  The gold-rated fund manager shares three ideas with long-term potential.
Silver linings for investors amid the climate stalemate: COP26 debrief
01/12/2021  Long-term investor sees opportunities where businesses are moving towards a zero-carbon future faster than governments.
6 qualities of great index funds
30/11/2021  To understand your fund, get to know its underlying index.
Lazard's 3 top picks for the energy transition
29/11/2021  These companies are set to profit from the move to clean energy, says Lazard.
An uneven energy transition leaves room for coal and gas: COP26 debrief
24/11/2021  The results of the COP26 climate summit suggest coal demand is likely to persist for longer than expected.
What rising inflation means for Australian investors
17/11/2021  And how investors can protect their portfolios.
6 inflation-tough stocks for global investors
08/11/2021  Morningstar thinks these moaty companies will remain resilient in the face of inflation and ongoing supply chain challenges.
Risk/reward equation still looks good at Westpac
05/11/2021  Morningstar maintains fair value despite a fall in margins and slower progress on cost reductions.
These aren't the Bitcoin ETFs you're looking for
19/10/2021  These new US-listed exchange-traded funds will invest in bitcoin futures, not bitcoin itself.
ESG funds don't underperform - but nor do they outperform
15/10/2021  The ESG outperformance narrative is flawed, new research shows.
Building investment portfolios in a low interest rate environment
06/10/2021  Investors may need to hold more growth assets over the coming years, says Morningstar's Jody Fitzgerald.
Covid impacts still being felt in real estate and tech: Reporting season roundup
01/10/2021  And how G8 Education and Link Administration are positioned for long-term success.
Look to Credit Corp for a leading indicator of economic health: Reporting season roundup
30/09/2021  What Reporting Season August 2021 told investors about the health of the financials sector.
Cause for optimism at a2 Milk and Invocare: Reporting season roundup
28/09/2021  a2 milk is an opportunity to be greedy when others are fearful.
Post-covid normalisation is underway in healthcare: Reporting season roundup
23/09/2021  Covid's winners and losers are returning to their prior trajectories. 
One of the most underappreciated dangers of investing
21/09/2021  Sequence-of-returns risk matters for both retirees and savers. Here's why. 
REITs recover pandemic losses: Reporting season roundup
20/09/2021  Analysts expect the sector to recover to pre-Covid trading levels once borders reopen.
Australian banks face margin pressure amid low rates: Reporting season roundup
15/09/2021  Rising customer deposits and access to cheap funding helped Australia's banks stave off net interest margin pressure, but analysts see warning signs.
Greenwashing explained
14/09/2021  Morningstar's Hortense Bioy on how to spot greenwashing and how to avoid it.
Earnings down as private money circles infrastructure: Reporting season roundup
13/09/2021  Utilities and infrastructure names battle the impact of covid as private equity and pension funds circle. 
Frenzy of mergers in energy: Reporting season roundup
10/09/2021  Hydrocarbons poised for a comeback.
TPG tipped to recover as mobile competition eases: Reporting season roundup
09/09/2021  Providers have lifted prices after years of a debilitating chase for subscribers at all costs , says Morningstar's Brian Han.
Short-sellers bet against ARK Innovation ETF
08/09/2021  What shorting ETFs means for long-term investors.
Surging lumber prices were no match for Brambles: Reporting season roundup
07/09/2021  Morningstar senior analyst Grant Slade says Brambles secular growth trend is intact despite nearterm headwinds. He discusses results from the building and construction materials sector.
Miners soar thanks to iron ore: Reporting season roundup
03/09/2021  Miners bask in the glow of iron ore prices while bargains remain in coal.
BHP-Woodside merger is mutually beneficial
23/08/2021  Post-merger Woodside would be well positioned to deliver on the value we've seen for a long time, say Morningstar analysts.
Investors are getting serious about sustainability
16/08/2021  But the sector lacks uniformity, says Morningstar's Christopher Franz. 
Long term outlook for AGL is positive
11/08/2021  Higher wholesale electricity prices bode well for AGL, according to Morningstar senior equities analyst Adrian Atkins.
How you can hedge your portfolio against inflation
11/08/2021  Morningstar FundInvestor editor Russ Kinnel describes some direct and indirect hedges for inflation protection.
The iron ore party can't last: Morningstar
10/08/2021  Copper and iron ore have benefited materially from China’s stimulus and the developed world recovery. But Morningstar analyst Mat Hodge see these benefit as transitory.
What the Afterpay acquisition means for investors: Morningstar Minute
05/08/2021  We believe the transaction has a high chance of succeeding.
Cannabis' federal legal status is not a total buzzkill
03/08/2021  The industry still has significant growth potential.
Stock of the week: Toyota
03/08/2021  Is one of the biggest sponsors of the Olympics positioned for an all-electric future?
2 listed microcap names to consider
23/07/2021  Morningstar's Lex Hall talks micro-cap stock picks with Carlos Gil, chief investment officer at Microequities Asset Management.
Big returns, big risks: Making money with microcaps
22/07/2021  Mornngstar's Lex Hall catches up with Carlos Gil, chief investment officer at Microequities Asset Management.
3 small-caps with Dawn Kanelleas
21/07/2021  The head of Australian small and mid-cap stocks at First Sentier Investors has her eye on ARB, Breville and IDP Education.
Forecast 2021–2022: A correction could be around the corner
20/07/2021  The strong performances of global stock markets in 2020–21 are unlikely to be repeated in the coming year says Morningstar's Peter Warnes.
'Overvalued' warnings grow as ASX 200 hits new high
12/07/2021  Morningstar equity analysts warn that equities remain overvalued despite Australia's strong economic recovery.
What to know about private equity
08/07/2021  Private equity is an exciting area for investors, with lots of hotly-tipped stocks. But there are risks to be aware of, says Pitchbook analyst Dylan Cox.
Lazard's 3 top picks for the global covid recovery
08/07/2021  Warryn Robertson is looking at French infrastructure, retail pharmacy and tax services.
Aussie banks $34bn surplus points to more shareholder dividends, buybacks
06/07/2021  Australia's largest banks have excess capital because they cut dividends, were more conservative on lending, divested assets and raised equity last year. Morningstar's Nathan Zaia thinks most of it should be returned to shareholders.
Weighing up the PEXA IPO
02/07/2021  PEXA burst onto the ASX this week in the biggest float since 2019. Morningstar's Gareth James gives his take on the company's future growth prospects.
Can the iron ore price keep rising?
30/06/2021  Iron ore prices have  been on a tear, boosting the profits of Australia's top miners.  How did we get here and is the only way up? Lex Hall sits down with Morningstar's Mat Hodge.
2 new stocks to watch
28/06/2021  Morningstar has recently initiated coverage of a food delivery app and a consumer finance product. 
'Strongest earnings season I've ever seen'
24/06/2021  Meeting the deluge of demand is the biggest task for US companies, says Bell Asset Management's Ned Bell.
Biotech beyond covid
22/06/2021  Are there still opportunities in the biotech sector now the covid-19 vaccine roll out is underway? We ask International Biotechnology Trust manager Ailsa Craig
Alibaba is still deeply undervalued
21/06/2021  Morningstar's director of Asia equity research is confident the e-commerce giant will bounce back.
Weighing up the Endeavour IPO
18/06/2021  A wide moat and attractive dividend potential are among the key takeaways of Woolworth's decision to demerge from the liquor and hospitality group.
'Then we got hit with the equivalent of a war'
15/06/2021  Lazard Asset Management's Warryn Robertson explains how companies in the Global Equity Franchise fund have adjusted to covid, and assesses the threat of rising inflation.
Understanding Magellan's active ETF strategy
11/06/2021  Magellan's Craig Wright tells Emma Rapaport why it is leading the charge in the active ETF arena and how its global equity product works.
3 off-the-radar small caps
10/06/2021  Callum Burns of ICE Investors explains his conviction in pharmaceutical distributor Ebos, PSC Insurance Group, and elite sports analytics provider Catapult.
Small cap gems and how to find them
09/06/2021  Callum Burns explains how ICE Investors identifies companies with original products and sticky customer bases.
Stock of the Week: Salesforce.com
08/06/2021  They’re building an empire.
3 oil stocks we still like
07/06/2021  A year ago the oil price went negative. How have oil giants handled the past 12 months and what's the outlook from here? Morningstar analyst Allen Good explains.
Considering crypto? Here's what to think about
04/06/2021  As the investment world goes crazy for crypto, Morningstar Investment Management's Dan Kemp explains what to consider before putting it in your portfolio
Why we like Wizz Air
03/06/2021  The airline sector is set to recover as international travel resumes. Morningstar analysts think Wizz Air offer the best opportunity among low-cost carriers.
3 global infrastructure picks
28/05/2021  4D Infrastructure's Sarah Shaw outlines the investment case for Spanish multinationals Cellnex, and Iberdrola, and the potential of Mexican airports.
Are crypto ETFs coming?
28/05/2021  The SEC continues to sort out its regulatory concerns.
Stock of the Week: Apple
27/05/2021  We’re raising our fair value as sales hit new highs—but investors need to put it in perspective, says Andrew Willis.