How to Invest When the Market Is Fairly Valued

Morningstar's Matt Coffina explains why a fairly valued stock should outperform both cash and bonds over the long run

Matthew Coffina, CFA 4 April, 2013 | 6:11PM
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What a start to the year! In the first quarter, the S&P 500 returned 10.6% including dividends, closing at a record high, while the FTSE 100 gained 8.7% and hit its highest level since late 2007. While there is a certain satisfaction in seeing the value of our stock investments swell, it's not all good news. The strong market is severely limiting investors' opportunity set. No doubt there are more than a few investors who were scared out of stocks during the financial crisis and have been left behind by this bull market--which is now entering its fifth year.

A fairly valued stock should increase in intrinsic value by somewhere in the region of 10% per year.

If there's a lesson to be drawn from recent experience, I think it's that we should never let emotion drive our investment decisions. Those who panicked at the bottom are quite possibly stuck with 50% losses. Those who kept their cool and stayed fully invested have been made whole.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Matthew Coffina, CFA  is a stock analyst at Morningstar.