With the recent strong performance of shares in Australia and around the world, you may be asking yourself this question. Well the answer is… maybe, maybe not!
What do the leading economists foresee in the financial indicators?
What are the stock analysts predicting for company forward earnings estimates?
What are the ‘gurus’ saying in the media about the best place to put your money?
In fact, none of these things is very relevant for most investors! Yes, that’s right… you don’t need to ‘predict the future’ to know whether you should be buying shares… and which ones to buy.
There are 3 key things you need to think about when considering the question, “Is now the time to buy shares?”
- Time Horizon – For how long do you intend to invest?
- Long-term goals – What is the money ultimately for?
- Cash Flow – What spending needs do you have?
- Time Horizon – For how long do you intend to invest?
Too often I speak to people who ask me to invest their money in shares, so they can use it for a major purchase in two or three years. That major purchase may be for a new home or renovation, for example… or even an aged care bond. When I tell them I can’t do it I get mixed responses, including a couple of people who were quite angry that I would not ‘make them some money by investing in shares’.
The truth is that unless you are willing to invest capital for at least five years, you should not even consider buying shares. I actually prefer my clients to invest their shares for a minimum of ten years. Now, some of your capital might be needed in the short-term (see below), whilst the remainder can stay invested for the ten year period.
Younger people with superannuation, for example, have a forced long investment time horizon. Under superannuation legislation, anyone under the age of 50 now cannot legally access their superannuation until they are aged 60. Therefore, they automatically have the ten year investment time horizon, which means, unless they are already doing so, now is the time to buy shares. Of course, if they were receiving good advice, they would have been buying shares for the last 5 years!
However, for anyone that might need their money in less than ten years, then the answer to the above questions is a resounding NO!
- Long-term goals – What is the money ultimately for?
One thing that astounds me is the number of people and advisers that invest money without understanding clearly what their goals are… and what the money is actually for! The reason for this very typical behaviour is our tendency as humans to want to ‘make a quick buck’, focus on returns and forget about risk. Too many advisers (financial advisers, stockbrokers and even accountants) are too focused on short-term gains, rather than making sure clients investment strategies are suitably tailored to make sure they achieve their long-term goals. That is, good, professional advice will ensure that a client doesn’t look back in 20 year time and wonder what went wrong!
So, the key to understanding whether now is a good time to be buying shares or not, is in understanding what the money is ultimately for. And then you can work out to what level you need your capital to grow. You (and anyone significant in your life) also need to spend some time asking yourself some of the hard questions such as
- What is really important to us about money?
- How much do we want to spend in retirement?
- What do we want with the money when we are no longer here?
Only with consideration of these important questions will you be able to construct an investment strategy that will leave you looking back, fully satisfied with the outcomes.
- Cash Flow – What spending needs to you have?
Particularly for those who are a bit wiser (read older!), the key to a sound investment strategy is cash flow… cash flow is KING!
Cash flow is one of the most important things to assist in meeting your long term goals (as discussed in the previous point). In particular, if you are retired you are no longer able to meet your spending needs by going to work each day and receiving a pay cheque. In fact, the transition involved in ceasing employment is very difficult mentally, as we now find that you have to rely on a ‘bucket of investments’ (often superannuation) to provide you with this cash flow.
So when designing a suitable investment strategy and your allocation to shares, we need to consider expected spending needs over the next ten years. It is not just ‘cost of living’ that we need to think about, but also the one-off expenditure items such as holidays, new cars, large gifts etc.
With a good understanding of these cash flow requirements, you can then determine to what extent you are comfortable to have money invested in shares. Remembering that it is a long-term investment and you need to be prepared to hold on for ten years.
With these important points in mind, you can see that you need not predict the future in order to determine when to buy and sell shares… in reality we know that no one can predict the future anyway!
As Benjamin Graham (Warren Buffet’s mentor) once said, “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight, or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework”.
So, is now the time to buy shares? It depends!