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Asking ‘What’s Going To Happen Next?’ Is Not The Key To Investment Success

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The science of what constitutes a successful investment strategy has been a solved problem for many years. Statistically, you will be rewarded over time for investing in non-cash asset types, broadly diversify your money across higher and lower risk assets that are aligned to your risk tolerance and investment timescale, then sit tight and just have a sensible rebalancing strategy to realign the balance once or twice a year.

It’s all well and good knowing this, but real investment success is actually determined by how we behave with this information.

Unfortunately, we humans are not always a rational bunch and you only need to look at our physical health as a good example. We don’t have to be fitness and nutrition experts to know what we should and shouldn’t eat and how much we should work-out. Still, our behaviour determines whether or not we reap the rewards of being consistent with our diet and exercise.

The noise of the media and most financial institutions, as well as some natural human behavioural traits, will have us believe that achieving investment success is about avoiding market dips, predicting which way markets are going to move and identifying the next hot opportunity – Arguably a feat that is very difficult, if not impossible to achieve.

Our next article looks at how investing is more a game of psychology and discipline than it is financial and analytical expertise.

The Short-Term Data Doesn’t Mean Much

Publicly listed companies must report and forecast earnings on a quarterly basis and one quarter’s worth of company data is a very small piece of information if trying to determine how a company will perform over the long term. Companies themselves may behave in ways that benefit the short-term numbers but are not necessarily reflective of the long-term outlook.

We should also be mindful that institutions that sell stocks and funds, of course, have the objective of selling as much of their product as possible and may use short term data as a way to promote the latest trend or what they think will be the next big winner. “ABC equities look good for next year” “XYZ Stocks are strong today”, “you should move your money into that” blah blah noise noise.

It is human nature and the fear of missing out to want what is performing well and to avoid not what isn’t. But unfortunately, that mindset can lead to us hop from one investment to the next and ending up with something that doesn’t make sense for what we are really trying to achieve.

In reality, there is no correlation between what is performing well today and what will perform well over the long term. Our best bet is to buy as much of the market as possible, i.e. diversify, hold as cost-efficiently as possible, ignore the short-term noise and stick with it.

Behaviour Overrides Skill

The behavioural side of investing is often much more important than any technical skill or intuitive ability.

You could be the most talented stock picker but if your emotions get the better of you, especially during volatile times, none of your skill matters. Being able to stay calm when others are panicking is what counts.

Morgan Housel, the author of The Psychology of Money, references Napoleon when describing successful investing, citing ‘A genius is a man who can do the average thing when everyone else around him is losing his mind.’ – Something that can be harder to do when the time comes.

The Real Risks Are Unknown

The word “risk” frequently appears when talking about investing and this can cause unnecessary fear for investors. The actual risk associated with investing in the market is a known risk – We have enough historical data to understand how the stock market will behave broadly, the short-term can be more volatile, but in the long term, it generally moves upwards, in fact roughly 75% of yearly market returns are positive and 25% are negative, we just don’t know in what order and to what extent they will happen.  If we can tolerate some level of acceptable short-term fluctuation, which of differs for each person, we will be rewarded in the long term for taking that ‘risk’.

The real risks are the ‘unknown unknowns’ that we have no way of predicting, such as the pandemic of 2020 and the global financial crisis of 2008. Why is this so? It’s not so much that such events can cause significant, albeit temporary, drops in the value of our portfolio, the real risk is that we react irrationally because of this and cash in the loss in value; that we pull out of the market thinking that doomsday is approaching and that markets won’t recover.

How can we prepare as investors?

A useful lesson can be seen in how we prepare for natural disasters. In places that are vulnerable to hurricanes, the residents know a hurricane is a real possibility, they don’t know for sure when the next one is coming. Still, homes and infrastructure can withstand one at any moment.

If your investment strategy is sensible, and you are prepared for the possibility of a market shock, you much more like to remain calm and withstand the volatility.

The Significance of ‘Time In’ is Overlooked.

Warren Buffet is one of the most successful investors of all time. Thousands of books have been written on his story and have tried to capture what it is that made him successful. However, one of the most significant contributing factors to his success is quite simple, he has been investing since he was 11 years old and is still investing now in his 90s. The average investor may start investing in their mid-20s or later and often will stop at age 65 when they “retire”.

Buffet has around 80 years of compounded interest on his side. Simple right? Yet as humans we often look for more complex solutions believing they will be the best option – it feels like we are making more progress if we have the most technical solution to our concern.

It feels more intuitive to chase ‘What is going to do well next? I need to invest in that’ rather than simply ‘The longer I remain invested, the more likely I am to reach my goal’.

The key message is that investing need not be complicated; a sensible investment strategy will get almost everyone to where they want to go – remaining disciplined for long enough on that journey to benefit from what is owed to you is the tricky part.

A big part of the value-added from engaging with an adviser is that we can educate you to develop positive investing behaviours as well helping you avoid making harmful financial decisions. Contact us today to start making smart decisions for your future.


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