I’ve spent 30 years thinking and reading about and investigating investment markets – why they work as they do, where returns are to be found, what my expectations should be and how and why investors behave as they do.
I’ve learnt that investing in growth investments such as property and shares will very likely produce better returns than cash and fixed interest. And that doing so will better support my retirement spending goals – or alternatively reduce the risk that my money runs out and I still have life left to live. I’ve learnt that the ups and downs of investment markets are a fact of life but over longer periods markets go up. The only question is how long we have to wait.
My rational mind has been applied to learning these things. If I diversify, if I’m growth-oriented and if I avoid letting the angst and doubt of negative periods encourage me off the path of good decision-making, I know the odds of success are stacked in my favour.
But then there is my emotional, irrational mind. Even after years of learning and despite knowing better, this part of my brain still wants its say. It wants to niggle, get frustrated, demand progress and occasionally feel anxious. And if that’s the case for me, no wonder clients and others, without the background of all the reading and research I have done, and under the pressure of often conflicting and unhelpful information in the media, remain predictably irrational. Which isn’t a criticism, but simply a statement on being human.
Experience makes it clear the rational or irrational behaviour of an investor can have a significant bearing on the success of their investment strategy. But to switch off the emotional aspects is to ask us to stop being human. We need the “Rip Van Winkle strategy”. It involves going to sleep and waking up at some time well into the future. There are many historical periods where this strategy would have worked very well but where instead many investors have fallen by the wayside, never having achieved the pot of gold.
To be successful investors, we need to recognise the weaknesses in our psychological makeup. Key skills include being diversified, ignoring the crowd, being prepared for periods of over- and underperformance as well as ignoring the need for immediate gratification and avoiding procrastination.
Beating the emotional and irrational is helped by knowing your goals and your timetable. By having a plan. And if tough times strike, recognising that very little has probably changed in achieving your goals except numbers on a page at a moment in time.
– Stephen McFarlane is an adviser with NZ Funds Private Wealth in Timaru. The opinions expressed in this column are his own. A copy of Stephen’s Disclosure Statements are available on request, free of charge.