Future Focus: 3 investing questions I’m constantly asked
The questions people ask me and my honest answers.
When people find out what I do for work, the questions usually come in fast. They rarely start with ‘Can you explain a discounted cash flow model’, or ‘What are your favourite relative valuation measures’.
Instead, they ask questions that they believe will give them a quick edge. Questions that if you are an investor, you’ve likely heard from a friend over a drink, at a barbeque or across a dinner table.
They’re simple questions, but they sit at the intersection of fear, uncertainty and a bit of greed. These are not easy questions to answer. I know the answers that people want and realise the truth won’t bring any satisfaction. I know people are looking for something definitive when all I can share is an overview of how I think about these nuanced topics.
Here’s three of the most common questions I’ve been asked, and how I think about them.
Should I invest even though we’re in a bubble?
I get this question often. My sister recently asked me this question at Christmas lunch.
This simple question has a lot behind it. Many people have a nagging feeling they should be investing but are confronting their own fears that they will make a mistake and lose money. What many people want is confirmation we are in a bubble so they can continue procrastinating.
This question is usually posed because the media is saturated with messaging that markets are overvalued, the housing market is broken, and technology stocks are inflated. The messaging all falls under the ‘this time is different’ theme.
This isn’t a new message – we’ve been in a bull market that’s been running for over a decade, and there is always an uncurrent of fear it is about to end. We all hear what we want to hear – and if investing makes you anxious, this is the message that will come through.
My short answer is ‘maybe, but bubbles matter far less for long term investors’.
The longer answer is that markets always feel expensive and precarious. There is rarely a time where investors will collectively agree that prices are reasonableand risks are low. If you’re waiting for the time when investing feels safe, you will likely never start.
The uncomfortable truth of investing is that you’re never going to know which moment is right to take the plunge. All I can tell people is that over the long run, markets continue to rise. I often encourage them to zoom out on market graphs to see that markets have always headed in the same direction.
What actually matters more than whether we’re in a ‘bubble’ is:
- How long your money is invested
- If you are diversified and invested in the right assets for your investment strategy
- If you can stick to it through uncomfortable periods
I try not to sugar coat it – if you invest a lump sum right before a market fall, that’s going to hurt you financially and emotionally. If you invest gradually, continue contributing and stay invested for the long-term, periods of short-term overvaluation matters less than people expect.
For most people, the bigger risk isn’t investing before a downturn – it is the downside of tactical allocation en masse. You’re staying on the sidelines indefinitely waiting for a certainty that may never arrive while the purchasing power of your money gets eroded.
Below is Morningstar’s Market Valuation chart. It shows how our Fair Value Estimate compares to share prices. This is our bottom-up long-term intrinsic value of where the market sits. At most points since 2017, the Australian market was considered overvalued.
If you were an investor who thought the market was overvalued in 2017 and wanted to stay on the sidelines until things felt more reasonable it is likely you would still be waiting. At no point has the Aussie market dropped to more than 10% undervalued according to our analysts.
The market doesn’t have to be an obvious bargain to go up. This is apparent when viewing the performance of an Australian market index ETF like Vanguard Australian Shares ETF (ASX: VAS).
Figure: Performance of ASX: VAS since 2017. Source: Morningstar
One way I like to frame this question is asking another question – what’s the alternative plan for your money if you don’t invest it?
The only answer I ever receive is ‘I’ll keep it in cash’. This feels like the safe answer, but inflation will quietly do damage over time.
Putting it in an offset account is a decent strategy, but it’s important that you consider your hurdle rate. If you don’t know that you won’t understand the opportunity cost of this decision.
If the answer is ‘I don’t know’, that’s often a sign of fear and not a strategic approach to your finances.
The simple way to answer the question is just to say that study after study shows that time in the market is much more powerful than timing the market, even when valuations look stretched.
What ETF should I put my money in?
This question often comes from people I’ve just met. If you know me you’ll be able to anticipate my answer. We’ve been conditioned by the financial media to think that anyone working in the industry will always have a tip – a security that they are confident will perform well.
Like many in the investment industry I spend time looking at securities and reading research and analysis from highly qualified professionals. It is not stretch to think I would have a few ticker symbols up my sleeve.
The honest answer sometimes feels like a cop out – I tell people there is no single ETF (or stock) that is right for everyone.
The better question isn’t which ETF to put your funds into, but what purpose it serves in achieving your investing goals.
Before talking about a specific investment context is required.
- How much is your sustainable surplus that you can invest regularly?
Most people do not invest in large lump sums. We invest in the way we receive funds which often come in regularly scheduled paycheques. Understand how much you can set aside each week, fortnight or month to put into investments. This is a key determinant of the type of investment you can choose.
It may seem simplistic, but it helps to put together a budget if you have not done it before (I like the downloadable excel from MoneySmart).This is a good way to understand what your sustainable surplus is to invest.
One of the keys to successful wealth creation is not only investing when you have money left over. It is committing to consistently investing. Look back on one year of your bank statements to see exactly where your money goes. Going back a year feels like a lot of work but this is the only way to capture episodic spending – for example, you may only pay your health insurance/ car rego/home insurance once a year. This holistic view provides a better foundation for budgeting.
The ask: How much can you invest, and at what intervals?
- What are you trying to achieve, and when do you need the money?
Goals are important. They allow you to monitor your investment accounts and understand when and what changes are needed to get you where you want to be in life. A goal gives you a yardstick which is especially important over long time horizons.
You don’t want to make any changes you don’t have to because it can result in tax and transaction costs. Therefore, each decision to change your investment accounts has to be informed by what you are trying to achieve. It’s important to think about what is important to you and how much you need to achieve your goals. This will make investing a much more successful and structured endeavour. This article runs through research from our behavioural research team, with practical exercises that help you get clear on your goals.
The types of investments that are right for you will be guided by when you need to access the money, or when you want to acheive your goal. If you need it within the next 2-3 years, equity investments may not be right for you. Remember that the longer you are in the market, the better the outcome but be realistic about your time frame.
I’m not personally investing to watch my account balance grow in perpetuity. For me investing is a way to live the life I want. You probably feel the same way. Pick a strategy that aligns with your time horizon.
The ask: What are you trying to achieve?
You can probably see why people that know me don’t ask me this question any more. This is a lot of homework when somebody just wants a ticker symbol. Nobody is looking for an answer that starts with ‘it depends’ yet to answer in any other way is disingenious.
If I want my money in ten years, should it be in stocks?
The time frame varies on this question. It might be ten years, five years or even two weeks. The shorter the time frame the more likely the person asking the question is simply looking for a predication on how the market will perform.
The question sounds straightforward but hidden behind it are several assumptions. The last time I was asked this question, it was a ten-year time frame. I’ll use this as a basis for answering this question.
Ten years feels like a long time to lock your money away in the market but many fund managers recommend at least a ten year holding period. 10 years can be a long enough period to benefit from growth assets while being short enough for a poorly timed downturn to really matter.
The answer isn’t yes or no. The answer is that it depends on how flexible that ten-year timeline is. Some financial goals need you to withdraw funds at a specific date – a house deposit, school fees or a business purchase. Being fully invested in equities at the 11th hour (or at a 9.5 year mark) may not be appropriate. Markets have absolutely no consideration for your deadline.
If ten years is more of a guide than a hard stop, excluding shares may be to your detriment. Over a decade, inflation can meaningfully erode your purchasing power, particularly if it’s sitting in cash.
In summary, shares are volatile in the short-term, and growth assets have historically been powerful engines for wealth creation over the long-term. As you get closer to reaching your goal, you will reach a phase where it will be wise to change the composition of your portfolio and transition out of growth assets. The right answer usually involves balance.
Importantly, this isn’t about predicting the market. It is about aligning the risk you are taking in markets with your financial goals so that you’re not forced to make decisions under pressure.
Final thoughts
Everyone is looking for ways to create a better life. This rarely works with hot takes or bold predictions, which on the surface is the intent of these questions.
People’s faces drop or they tune out when I don’t give them the answer they are looking for. Investing isn’t about being the smartest person in the room and people that understand investing can’t conjure money out of thin air.
Building wealth requires creating a system that works for you and what you are trying to achieve. Unfortunately, explaining how to do this normally takes far longer than it takes me to finish the drink in my hand.
Invest Your Way
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