If you’re serious about building wealth over the long term, the most important skill isn’t predicting the future – it’s stepping back, understanding what has already happened, and learning from it.
It sounds simple, yet even the most rational among us struggle to do this.
Your brain is wired to give more weight to what’s happening right now
This is because our brains instinctively focus on recent events, rather than learning from decades of market history.
This phenomenon, called “recency bias” by behavioural economists, can trip up the smartest among us, including Nobel Prize winners and successful fund managers.
When markets climb for years, it’s easy to believe that momentum will never stop. On the flip side, when they drop, it can feel like they’ll never recover.
Of course, neither belief is true, and reacting to feelings created by temporary conditions can prove costly. The smartest investors understand this psychological challenge and recognise the need to overcome it.
Train yourself to zoom out and look ahead
To defend against your brain’s natural wiring, you need to zoom out and stretch the time frames you use to judge what’s happening.
Instead of fixating on this month’s performance or even this year’s market moves, focus on long-term cycles.
When you do this, all the “big events” you believed would disrupt your investments fade into the background.
The scary market dip you couldn’t stop thinking about barely shows up on a 10-year graph, and that healthy three-year bull run becomes a small blip in the grand scheme of things.
Focusing your attention on long-term time frames also helps you see the cyclical nature of investment returns and steadies your nerves.
As a result, you’re less likely to react and sell when markets are low. Likewise, it could prevent you from growing overly confident, which could lead to poor decisions when markets are riding high.
Don’t take “amazing” returns for granted
As we approach the end of what could be the third successive year of strong equity returns, things are looking good – but this comes with risk. When amazing investment returns start to feel like the norm, it’s easy to assume the good times will keep rolling.
History tells a different story.
Long streaks of above-average returns are rare, and don’t last forever. Markets are cyclical by nature. Strong years are followed by weaker ones. While it sounds like doom and gloom, it’s simply how markets work.
The investors who thrive aren’t the ones who dodge each downturn. They’re the ones who expect them, plan for them, and stay cool and disciplined when cycles shift.
Instead of getting caught up in the excitement of ever-greater returns, zooming out allows you to view the current market strength as a normal part of the cyclical behaviour we’ve seen before. As such, you’re more likely to remain unflustered when conditions inevitably change.
Develop your ability to “zoom out”
Sadly, zooming out doesn’t come naturally. It takes effort, especially when your recent experience seems to prove your biases right.
Your goal should be to remain objective and see the reality of the situation, regardless of what’s happening in the markets.
The next time you’re tempted to make a substantial change to your portfolio, pause and ask yourself:
• Am I reacting to short-term noise?
• Am I responding to a genuine, long-term shift in fundamentals?
Ultimately, investors who hone the ability to zoom out are often the ones who successfully compound their wealth over decades.
As financial planners, we’re here to help you keep perspective, particularly when it appears hardest to do so.
Remember: remaining focused on the long view gives you the best chance to build lasting wealth.
