If you had asked us a year ago how much global stockmarkets would rise we wouldn’t have guessed 20%. If you had asked us five years ago, whether global stockmarkets would average 15% every year we would have said no. If you had asked us ten years ago whether global stockmarkets would average 12.5% every year, we would have asked what you were smoking. An investor fully invested in equities at the right time in the last decade could have trebled their money (let that sink in). Anyone who tells you that they predicted these stockmarket returns, back away from slowly.
It is always fun at this time of year to look at the usual commentators’ New Year predictions from a year ago. Amongst the ones that haven’t been erased from the internet, you can find plenty predicting a tough time for stockmarkets, following the sharp gains of 2020. Bank of America, SocGen and CitiGroup predicted a 1.3% rise for the S&P500 (index of US shares) and it went on to grow 27%. For the most fun you can have in finance take a look at the US forecaster, Harry Dent’s past predictions here. He is a prolific writer of books, predicting booms ahead of the 2000 DotCom bust and 2008 Global Financial Crisis and huge crashes ever since. As with every forecaster he will eventually be correct, at least once (like the proverbial stopped clock).
You might reasonably ask why people keep buying Dent’s books as he hasn’t been correct since 1989’s Japan market crash. The answer is that as humans we all tend to see patterns where they don’t exist and we don’t cope well with randomness. This trend seems to be getting worse as we all split off into our own online echo chambers. Over half of Republicans believe that the 2020 election was stolen from Trump vs 3% of Democrats and more worryingly the same proportion of Republicans believe the QAnon conspiracy madness. There are plenty more everyday examples; horoscopes, sporting superstitions, gambling, crypto and 5G mast burning.
Whilst it is easy to roll an eye at other people’s gullibility, in this country we largely still believe in the ability of active managers to outperform markets, despite all of the evidence to the contrary.
The concept that humans might not think and act rationally is as old as economics itself and apart from the theory of Homo Economicus (rational man), the field has expanded to list the various ways that we betray ourselves through our actions. There is now a huge list of behavioural biases and they are even taught as part of the curriculum of the CFA investment management exams. All of this knowledge of our failings has not, though, made us any better at avoiding them. If anything we seem, on average, to be getting more partisan and less open in our thinking.
So how can we help ourselves when it comes to our own money?
The first lesson is a free one that the markets keep giving us, year in year out. If you invest in shares, you will make a lot of money (above inflation) provided you invest for the long-term. If you cannot stomach the falls that inevitably come with the gains, or you don’t have the long-term to invest, then bonds can dampen down the upward and downward movement of your portfolio.
The second one is not always free and is one that a good financial planner can give you. If you can reduce the cost of holding those shares & bonds, reduce the tax payable on the income & gains and if you can remove the emotion from your investing then you can make even more money.
The third one is the hardest and only an excellent financial planner or a money coach can give you this one. If you can find your purpose in life and fit your money to your purpose, then making money becomes a secondary consideration.