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.

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