2017’s global economic outlook is, as we can all see, filled with uncertain events. A few of them are: President Trump abandoning the Trans-Pacific Partnership, the broadly anticipated rate hike by the Fed and Britain’s withdrawal plans from the European Union.
In times like this, it is only human to feel anxiety and fear. But as American businessman and stock investor Peter Lynch says about investing, “Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.”
So here’s a tip for you in 2017 – Remember that time is your friend.
A big part of making money grow is to take advantage of time. People in their 20s or 30s might shy away from investing these days, but they are actually the most suited to own riskier investments like stocks.
That’s because young people have lots of time to recover from market setbacks. A ride up is followed by a ride down, and the ride down inevitably is followed by a climb back to high ground. The longer your time horizon, the less market risk is a factor.
Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.
So if you’re waiting for significant signs of market stability or for the market to hit low ground before you start investing, that could be very costly. The longer you wait to invest, the more growth you miss.
Instead of trying to time the market, letting your money “spend time” IN the market is the secret sauce that allows your wealth to multiply, due to the long-term effect of compound interest.
American voters have chosen to bring big change to the White House. But resist doing the same with your long-term investments, they will be fine.
Many investors worldwide began to sell late Tuesday (November 8th U.S. time) as Donald Trump looked set to win the presidency. Stock markets tanked from Asia to Europe, and a similarly steep drop seemed likely when U.S. markets opened.
On the contrary, stocks proved resilient Wednesday morning (November 9th U.S. time), benefiting those who sat on their hands instead of selling immediately.
Elections can mean big, fast short-term swings for stocks and other investments. And emotions tend to run high in times like this, so it’s understandable if you find it hard to stay calm and leave your portfolio alone.
But we have to remember, history has shown that volatility after surprise events always die down. There is no logic or reason to why markets go down after somebody is elected as president. Most of this is due to speculative or irrational investing.
Long-term investments are meant to be held for many years to your retirement and longer. Big swings in the interim are normal and should be expected. Volatility is the price that investors pay in exchange for the higher returns that stocks have historically provided over bonds and other investments.
So rather than changing around your portfolio, focus on your career, hobbies and family, and avoid being overwhelmed with information. This is just one of the many events that will ride out itself.
Being aware of our behavioural biases could mean a significant increase in retirement savings. There are two common biases that can affect how we save for retirement:
1. Present bias – the tendency to put more value in current or short-term decisions than the future
2. Exponential-growth bias (EGB) – the tendency to underestimate and neglect the power of compounding investment returns.
A person with present-bias may intend to save more in the future but never do so; while a person with EGB will underestimate the returns to savings and the costs of holding debt.
All is not lost, however, as understanding your own biases is the first step to creating a proper retirement savings plan to fund the lifestyle you want when you stop working.
Self-awareness has the potential to reduce the impact of our biases. For example, a person who is aware of his/her EGB could rely on the market to acquire tools or seek advice, and a present-biased person could use committed arrangements to control the impulses of his/her future self.
It is proven that people who understand their EGB, hence accurately perceived the power of compounding, had about 20% more savings than those who neglect compounding completely.
So what does this mean? Be aware and keep check of your biases, and your retirement nest egg could be a lot bigger.
Since the UK voted to leave the European Union on 23 June, global markets and currencies have reacted negatively to the uncertainty, with a significant falls across all major equity markets. The British pound fell to a three-decade low against the US dollar – its biggest one-day fall on record. Markets are likely to remain volatile until it becomes clear what Brexit will mean for the UK and the rest of the EU.
What does all this mean for your portfolio? Clearly, no one knows for sure. But no matter how markets react in the next few months, you should follow this advice: Don’t let fear of the unknown – or your emotions – make your investing decisions for you.
Why we let emotions drive our investments. We tend to be controlled by our emotions regardless of circumstances. We become overly excited and ready to invest at the worst possible times. And when it comes to deciding how to invest, we often rely on poor advice, a hunch or worse – speculation we heard on the news or the radio. On the other hand, we sometimes let our fears and emotions keep us out of the game altogether.
How to take the emotion out of your investment strategy. Whether you’re worried about how global events might affect your portfolio or just fearful in general, the best investment strategy is one built for the long term. In other words, once you map out a lifelong investing strategy with your financial advisor, you should have confidence in that strategy regardless of the blips you’ll endure along the way.
While it can be fun to “play” the markets, investors should refrain from playing or risking too much on a handful of bets. It is much more prudent to keep your investments boring by broadly diversifying across big and small companies, domestic and foreign companies, and between stocks and bonds.
If your portfolio is properly diversified, stay cool and await developments.
At the end of the day, investing is a game of consistency – one where the investors who take the longest approach usually win. And when it comes to emotional investing – whether out of fear or confidence – the only way to win is not to play.
There is much fear–mongering in the different media which we are exposed to everyday. Take a look at the money section of any website, newspaper or magazine and you will find stories warning you about the Chinese economy, the Federal Reserve’s interest rate policies, the impact of the U.S. presidential election, global oil markets and market volatility.
But none of these stories—while interesting to read and think about—is worthy of spending too much of your brainpower.
Why? Because these big global factors are beyond your control and will be resolved without the slightest help from you.
You cannot control how the S&P 500 will perform or whether the European region will restart pumping profits. History has shown us that there are times when the U.S. markets outperform foreign markets and when the opposite is true. This is also true when it comes to growth stocks, value stocks, small and large companies. There is no way to successfully or consistently predict what will happen next.
So why do we bother?
Psychologists call it the “illusion of control“. Our intellectual minds tell us we can figure it out, even when—trust me—we can’t!
Putting your precious time into what you CAN control is really the only sensible way to go.
Here are six actions where focusing your energies in will reap you rewards:
- Develop rational goals built on your values. Let’s face it, without a real plan, you have decided to drift and hope for the best.
- Consider possible life transitions and how they might impact your actions. Transitions rarely give notice, so considering the impact of possibilities allows you to put solutions in place.
- Build agreement with other stakeholders (your spouse, a partner) on strategies to reach your goals. With all parties working toward the same goals, you’re more likely to be working for each other and get things accomplished.
- Invest time and resources to work with professionals who can help move your goals forward. Whether it’s creating a retirement plan or a proper risk management plan, you’ll benefit from working with experienced experts.
- Know your financial numbers and assign priorities for savings, accumulation and spending. Consider a rating system from 1 to 5, where you assign a point system to where your paycheck and resources go.
- Understand more about the “whys” of your life. Our beliefs don’t just arrive in our thinking like a magician’s trick. On the contrary, your money beliefs—your mindset—come from your money history over the course of your life. And it’s that mindset that determines what you consider the norm. Taking the time to understand whether your beliefs support your values is always time well spent.
These actions are very specific to you—you make the choices, decisions and actions that will support the outcomes you desire.
Devoting time to the economic issues of China or whether equity markets will rise or fall is beyond your ability to control and will only divert your attention from what really impacts your life.