If you’re investing for the long term, chances are you already know a thing or two about how your own mindset, cognitive bias, and behaviour contribute to the success of your investments. You understand that you sometimes need to make difficult choices if you are to stick to your plan and achieve your goals.
But no matter how savvy you are about possible distractions from your plan, the fact remains that you are only human – we all are. And even the most confident investor is likely to come up against scenarios that challenge their resolve. The key principles of investing might be straightforward in theory, but they can be challenging to put into practice consistently.
Usually, we’ve found that it’s external factors that tend to knock confidence. Big world events like the recent collapse of Silicon Valley Bank, Signature Bank, and Credit Suisse can evoke strong emotions that are difficult to ignore. But, if you allow them to influence your financial decisions, these emotions can wreak havoc on your financial wellbeing and scupper your future plans.
You can’t always control how an event makes you feel, but with a greater understanding of how these emotions might negatively influence your investment decisions, you can begin to control how you respond to them.
Here are two common mistakes made by investors when uncertainty on the markets causes emotions to drive their decision-making.
1. Attempting to predict the next economic event
The economy is an extremely complex organism influenced by a host of different variables and factors. It’s an economist’s job to make sense of how the economy works and enable the rest of us to understand how things like inflation, interest rates, and economic growth affect one another.
These insights can be extremely helpful for investors – that is, until the economists attempt to make future predictions about what could happen next. The media seems obsessed with trying to figure out what will happen in the future, but as you probably know, this is usually a fool’s errand.
Why? Because the predictions that sell newspapers most effectively are usually the ones that create the strongest emotions. This means the headlines are rarely going to suggest a slow and steady trajectory that reassures investors and keeps markets calm. Instead, they can cause panic or excitement, two emotions that often direct investors to make poor financial decisions based on nothing more than an estimate.
Economic forecasts also tend to be fairly inaccurate, if previous years are anything to go by. This seems obvious when you consider that the economy is usually influenced most strongly by local and world events, which by their very nature simply cannot be predicted. With so many variables at play, there’s no telling exactly what could happen next.
So, while it’s usually a good idea to stay informed about what’s going on in the economy, remember that short-term events are just that: short term. Try not to let yourself get caught up in the hysteria of the headlines predicting that the end is nigh. Your investments – and your future financial self – will thank you for it.
2. Believing that you know what will happen next on the stock market
Predicting what might happen next in the economy is one thing, but another equally foolish temptation is to believe that you can predict what will happen next on the stock market.
One of the reasons economic factors cannot reliably predict the behaviour of the stock market is because the two systems are fundamentally different. While economic metrics will show you what has happened recently, the stock market is more forward-looking, since it is composed of millions of investors who each have their own dreams, goals, and plans for the future.
This makes the stock market entirely unpredictable, so it simply isn’t possible to say with certainty which way it will go or how it will respond to a given event or trend. No one can tell you what will happen tomorrow, next week, or next year; anyone who claims they can is simply lying.
Sometimes, you might feel as though your past experiences have given you a good idea of what might happen next, and how to invest to benefit from your anticipated outcome. But a much better use of your time and energy is to carefully balance your portfolio in consultation with your planner.
Assess your own personal attitude to risk and what your long-term goals are for your lifestyle, your family, and your career and view these factors as your own personal “north star” when making investment decisions.
Increase your likelihood of investing success by ignoring predictions
It’s easy to feel that the world is now more uncertain than it has been in the past. But remember that this will always be the case until you know the outcome of an event – which of course can only be known once it is in the past.
In reality, the economy and the stock market are exactly as uncertain as they’ve ever been. Just as previous bull and bear markets have come to an end, so too will the uncertainty currently driving returns. As soon as it does, it will undoubtedly be replaced by another, equally difficult-to-predict event.
Average long-term returns can usually be calculated using historical data and trends, but in the short term, uncertainty really is the only certainty for an investor.
You can either allow this uncertainty to determine your actions, or you can choose to ignore the doubts and stick with your balanced portfolio, trusting that it will support you through thick and thin and give you the potential to achieve your long-term life goals. If this sounds like something you’d prefer to do, we can support you on that journey and keep you feeling confident even on the days when doubt begins to creep in.
You can read more about the benefits of focusing on your long-term goals in times of uncertainty on our website.
Get in touch
If you’d like support in creating a balanced portfolio that gives you the potential to achieve your long-term financial goals, we can help. Either contact your financial planner directly, email us at hello@ascentawealth.com or fill in our online contact form to organise a meeting and we’ll get in touch.
