As investors we are sometimes a curious bunch. Despite our best understanding of what is required in order to grow our capital over the longer term, we still often remain susceptible to herd behaviour and sometimes make very emotional and counter-intuitive decisions when it comes to investing. It is these emotional decisions which often undermines our ability to execute our best made plans and it is therefore important to be cognisant of our behavioural biases, whether they manifest as irrational fears, in overconfidence in our ability to predict the future or the natural inclination that most of us are inherently risk averse, as reflected in the fact that we feel the pain of investment losses much more acutely than the comfort we take from equivalent gains.
Investment theory would have us believe that, with a much greater understanding of what makes global economies tick and with increased central bank interventions, economic cycles and markets should be reacting more rationally and smoothly to real-time data availability. Looking however at the recent evidence, it seems as if the contrary may be true.
Nowhere has this been more evident than in the recent swings in volatility we have witnessed in global markets. Chinese equities, after lagging global indices for most of the last 7 years, witnessed a spectacular rise and doubled seemingly almost overnight – spurred on by euphoric enthusiasm of retail investors – only to subsequently come crashing down as violently. Nervousness around the global economy and more recently particularly around Chinese growth has also sent shockwaves rippling through the market.
Some of this can of course be rationalised. Global growth is in a rather precarious state of flux, with the US economy not quite yet showing the signs of real-wage growth and increases in consumer spending that would warrant the US Fed to increase interest rates (which they are very keen to do in order to give themselves more scope for monetary policy control going forward). Most recent data out of Europe also suggests that the recovery there is slower than anticipated, despite coming off a very low base. China has also showed further signs of slowdown – even if we are to believe their growth numbers (which many market experts do not) and it is clear that China is struggling to make the switch from export-led dependence to domestic consumption-led growth, despite the government throwing vast sums of money at the problem.
And herein lies the investment and, for many of us, emotional predicament. With the current amount of global uncertainty and market turmoil, is this the right time to be investing, or should we be running for the hills?
Despite the vast number of financial experts – many with starkly contrasting investing opinions – the truth is that no-one possesses the ability of perfect foresight when it comes to these matters. A well thought through and consistently executed process always trumps outcomes based prediction. The true value and merits of having an appropriate, personalised and rational investment plan, tailored to our own specific needs, is predicated on the assumption that no-one can predict nor will get every market move perfectly right, but more that the level of risk taken - and the commensurate reward required in order to achieve financial success in retirement - should be appropriately balanced in order to allow us to stop taking our eye off these daily market moves and instead enjoy our daily lives.
Time and time again behavioural finance has shown that, as an investment public, we react very emotionally and hence more often than not rather destructively when it comes to making personal financial decisions – chasing yesterday’s winners, taking too much risk, or then panicking once the bottom has dropped out of the market (and likely then compounding this mistake further by disinvesting precisely when it is too late to be doing so).
Herein lies the value of seeking the advice of an independent party who can assess our individual appetite and need for risk and in doing so help us put together a long-term plan and goals which are suited to our individual needs.
Making rash decisions about potentially binary market outcomes is not the ambit of professional investing. Instead we need to be appropriately positioned to achieve our desired long-term investment goals irrespective of short-term market fluctuations and within a framework which caters for the best chance of our success, no matter what the markets throw at us.
In the words of the economist Hyman Minksy: “Constant stability will ultimately lead to greater instability”. The drop in global markets is part and parcel of the general ebb and flow of the system and with it comes greater opportunities than have been afforded thus far.
The best of breed manager’s that Optima Brokers makes use of, have been sitting on unprecedented levels of cash in the respective mandates. This will now ensure that more attractive opportunities can be seized upon, improving the longer term growth objectives within the different client mandates.
This is then anything but the time to sell and is instead a period of increased opportunity.