Smart long-term investors generally have a good understanding of the mindsets and behaviours that lead to financial success. They diligently act on a solid plan and have thought through the various trade-offs that all financial decisions demand.
However, even the best of us are still human. While the principles of smart investing may be simple to understand, they’re certainly not easy to act on consistently.
Every significant world event affects our financial system. These events typically evoke emotions that, when acted on, can be detrimental to our financial health. Unfortunately, emotions are highly contagious, and when these emotions make it harder to be good investors, we must be careful about how we proceed.
In particular, there are two temptations we see even smart investors face on a very regular basis. Successfully dealing with these temptations is what separates good investors from great investors.
Forecasting The Economy
Economists are charged with understanding how our economy’s complex web functions. They help us understand the relationships between interest rates, inflation, economic growth, and other factors. Ultimately, their knowledge informs policy decisions that feed through the entire global economy.
However, they inevitably get seduced by the financial media into making predictions about the future trajectory of the economy’s vital markers. While understanding the current trajectory of key metrics is helpful in understanding the market’s current position in a cycle, relying on these metrics to make outright forecasts that tempt long-term investors into making financial planning changes is very risky.
Predictions of a slow reversion to the mean don’t prompt many ‘clicks’, so we expect the outrageous predictions to continue for the time being. However, the reality is that making accurate forecasts about variables highly dependent on one another is a fool’s errand.
Timing The Investment Markets
Linked to the first temptation of forecasting the economy comes the investor’s biggest temptation of all: the misplaced confidence that the investment market’s volatile cycles can be timed consistently.
The reality is that stock markets are highly unpredictable, often reacting in ways that are confusing, even to seasoned investors. A television pundit trying to summarise why the global market moved in a specific direction on a particular day is, unfortunately, nothing more than an attempt to fill airtime. The unvarnished truth is that we don’t know why the market behaves the way it does.
Trying to guess when markets are about to go down so that we can profit or run for cover has cost many investors a lot of money. The long-term investor’s focus is better directed at ensuring that they’re invested in the right asset mix and understanding that their behaviour is vital to their financial success.
A Better Way
As investors, we can never be certain about what the future holds. History is just a long list of surprises we were dealt, which we ultimately navigated in the best way we could.
The current economy has potential risks, as every economy always has, but assuming that recent trends will continue indefinitely is unrealistic and unhelpful in our quest to make smart financial decisions. The current investment market is also no more uncertain than ever. While we invest with average return expectations, the short term will almost always be volatile in both directions. Avoiding the temptation to time these cycles is the intelligent investor’s most important skill.
Important
Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.
Investment into any portfolio should be regarded as for the medium to long-term.
This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action.
