Why Do Investors Focus on the Wrong Things?
From: www.behaviouralinvestment.com
“Nothing in life is as important as you think it is while you are thinking about it.” – Daniel Kahneman
Which major investment issue were you thinking about on March 11th 2016?* You probably can’t remember even though, at the time, it seemed incredibly important. Whilst most of us should be investing for the long-term, markets conspire against us; lurching from one obsession to the next, drawing our gaze and enticing us to take action.
As the news about a particular event or development takes centre stage, and experts hold forth about the potential outcomes, the notion of doing nothing can seem ridiculous. The issues are, by definition, salient, recent and available; all factors which make it very difficult for us to have any reasonable perspective on their long-term significance.
It is not that matters such as war on the Korean Peninsula / peace on the Korean Peninsula or Italy leaving the EU are not meaningful (to take recent fascinations), but, from an investment perspective, there is very little most investors can do to benefit. Each year there is a succession of topics that we become excessively diverted by, where the temptation to act is strong; but before we do, we should try to answer the following three questions:
1) Does it matter to returns? Given that we tend to hugely overstate the importance of the issue that we are currently focused on, we are likely to assume far more things matter to long-term returns than actually do. It is vital to remember that the historic long-term returns of major asset classes inevitably include periods of tumult at least as significant as the one that currently has our rapt attention.
2) What is going to happen? Even if we are confident in the view that returns will be impacted by a given issue, we then have to predict what the outcome will be. I think enough has already been said about our ability to forecast such things.
3) How will it impact markets? In the unlikely event that we have identified an event that will materially alter asset class returns and successfully envisaged the outcome, we then need to understand how markets will react. Markets are reflexive and unpredictable. Do we really know how other investors will behave or what’s in the price?
