In preparing these students for their investment journey, we’ve stressed that knowing what not to do is just as important as knowing what to do. These investing hacks remind us of some important but often forgotten investing basics. Every day is a school day, so let’s learn along with these young investors.
Know your history.
Political pundits and TV commentators would have us believe it is a scary time to be alive. However, if we look at the history books, markets always have and always will climb a wall of worry, rewarding those who stay the course and punishing those who succumb to fear.
Warren Buffet expressed this beautifully when he said, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shock; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Such it has ever been, thus will it ever be.
Which of the following do you think is most predictive of financial performance: a) market timing b) investment returns or c) financial behaviour? While most people will answer that timing and returns are the biggest drivers of financial performance, research shows individuals are both the friend and foe of their own portfolio.
What happens in the financial markets in the coming years is absolutely out of your control. But, being able to guide your client to follow a plan, diversify across asset classes, and maintain composure is squarely within your own power.
Don’t equate risk with volatility.
Risk is the likelihood that your client will not have the money they need at the time they need it. Nothing more, nothing less. Paper losses are not “risk” and neither are the gyrations of a volatile market.
Don’t focus on the minute-to-minute.
Despite the enormous wealth-creating power of the market, looking at it too closely can be terrifying. A daily look at portfolio values means clients see a loss about half of the time, whereas a yearly look shows a loss merely a quarter of the time. Set up an annual review with your clients to help them feel more secure about the performance of their portfolio.
Don’t give into action bias.
In most situations, increased effort leads to improved outcomes. Want to get fit? Start running. Want to learn a new qualification? Go back to college. Investing is that rare world where doing less actually gets you more. There is a well-known illustrative story of a study done by an asset manager, when surveying their accounts to see which had done best, they uncovered something counter-intuitive: the best-performing accounts were those that had been forgotten entirely.
Our Investars are very quickly grasping that in all market conditions, you can only control what matters most – yourself.