Last year was a particularly trying one for investors. While no one can guarantee what the year ahead will bring in the markets, what we do know for sure is that investor behaviour is the biggest factor that makes or breaks long-term investment outcomes. A few resolutions can help you avoid costly mistakes.
1. I will use the daily news as dinner conversation and not as an investment decision tool.
We all suffer from confirmation bias, which is the tendency to focus on news that supports our views and to disregard anything that doesn’t. This behaviour helps to drive the bear and bull cycles of the market: when markets are down, investors will often disregard good news, while in the bull phase investors will disregard warning signals and continue to drive markets higher. Markets trade on sentiment – but that doesn’t mean you have to.
2. I will not subscribe to yet another market feed.
More news is not necessarily better – nor will it add meaningfully to your knowledge. Focus on a few reliable and credible sources that provide you with a good overview of the market.
3. I will be cautious of hype.
There are over 50 stocks on the FTSE/JSE All Share Index that are currently trading at 50% (or more) below their five-year highs. That is hard to come back from if you bought in at the top. Tread carefully when it comes to over-hyped shares. It may feel like you are missing out in the short term, but it could save you pain in the long run.
4. I will remind myself that a share price is an opinion of what a company is worth, and no more.
Where that price came from is irrelevant to where it is going. Ask yourself what a company is worth now, given what we know. Emotional attachment can lead to costly mistakes.
5. I will remember that market prices overreact both on the upside and the downside of the environment.
And therein lies the opportunity for the rational, long-term investor.
6. When I’m tempted to worry about the future, I will focus on the things I know will not change.
These include the power of compounding, the importance of diversification, and the impact of skill. By focusing on your long-term investment plan and remembering how market forces can work in your favour even in volatile times, you will be better equipped to ride out the storm.
7. I will remember that investing is a long-term game.
Some of the most admired investment businesses have been built over 30 years or longer. When you review their histories, patches of volatility, uncertainty and hardship will be evident. Yet, the ones who stuck to a well-proven process lasted and flourished, and their clients were well served. Any long-term investment strategy will be tested over time. It is the investor who partners a long-term view with good advice and the fund manager who takes a long-term view when making investment decisions who will have the best chance of success.
Have a good year of investing.