When is a good time to invest?
THE worst must be over. Investing is back on the acceptable list of dinner party conversation topics.
A few short months ago bringing up almost anything to do with investing – super or sharemarkets in particular – was a real party conversation stopper. People would quietly move away to start up a conversation about something more interesting – anything was more interesting than super.
But it’s back. At this point the behavioral finance academics are all nodding sagely and reminding us that our emotional drivers should not be underestimated – losses hurt both our portfolios and our egos. Denial arrives and people stop looking – and talking - about it.
Then along comes a 40% rally on the Australian market since early March and suddenly its OK to be talking shares and super again.
Hindsight is a wonderful thing but it would have been really insightful to have surveyed a group of investors back in early March and asked them whether they thought it was a good time to invest.
Chances are most would have said it was not a good time to invest given the ghastly 12 months we had just endured on world sharemarkets and the fractures that appeared in the global financial system.
Contrast that with a US survey of investor attitudes in February 2000 – at the height of the dot.com bubble. More than 75% of investors thought that was a good time to invest. It wasn’t. Fast forward to March 2003 and 59% of investors thought it was a bad time to invest – it was the start of the great bull market run on US stocks.
Who couldn’t make a fortune with the benefit of hindsight.
It is no surprise that after such a strong run on the local sharemarket – from the start of 2009 the broad market index is up around 19% - we should all be feeling a little happier and more confident.
So is now a good time to invest? Certainly there is a sense of relief that even if markets fall away from here while waiting for the real economy to catch up confidence is high that things have stabilised and growth will resume.
But we may well not be out of the woods yet so risk remains. How would you feel if you have been sitting on cash since March and decide to invest in September only to see values drop?
That is the risk that the study of behavioral finance warns us about – investing in periods when confidence is high and running for the term deposits when fear is rampant.
So the trick is to take the emotion out of the equation. It is when dollar cost averaging offers to shield us from some of the emotional upset – if you are investing $120,000 and you do it over the next 12 months in $10,000 lumps then if after month one the market falls you take comfort from the fact that the remaining $110,000 is still in cash. If the market goes up – great your $10,000 has just increased in value and the behavioural finance studies tell us we won’t suffer regret because the rest of the investment did not share the gain.
A lot of discussion about investing is technical and assumes a high level of rational behavior. Most people are simply not wired that way so techniques like dollar cost averaging are simple ways to minimise the role our emotions play in our investing decisions and help us keep a longer term perspective.
* Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia. To receive this column by email each week go to www.vanguard.com.au and register with smart investing.