The futility of trying to guess the future!
The year is not yet halfway through and we have already had the fastest entry into the Dow Jones bear market, one of the best known and oldest American indices, as well as unimaginable numbers of unemployment in record time and devastating economic damage.
As if this were not enough, and at the same time, we have seen violent protests and social unrest in the US with demonstrations in other cities around the world - even the US president being temporarily transported to the White House presidential bunker.
But what has been happening in the stock market in the meantime? After a violent drop of almost 35% in about 3 weeks, the S&P has already made up three quarters of the drop is rising close to 14% in 12 months and MSCI World (from a European investor's point of view, no currency protection) about 7.5% in the same period.
Let's imagine that someone a year ago told you what the world and the economy would be like today. Would they have bet on the rise of the stock market?
This constant obsession with trying to guess the future is not only a distraction, it drives investors to underperform. I almost hear you say: “but I'm not average, I'm a better investor, I always follow the news and I'm on top of things”. However, studies over the years have shown us that most people think they are smarter than average (“On a scale of one to 10, you probably think you're a seven. And you wouldn't be alone.” I would say that most investors being, by definition, average think it's better than average.
I admit that emotionally I am a “bad” investor. I always want to sell when things are going down and I want to strengthen when everything is going up and going well. Who doesn't feel it? Due to these feelings (which, I reinforce, are normal, whether we are amateur or professional investors) I get into a huge conflict between emotion and reason when there is a strong drop like the one that happened this year.
With this I wanted to convey to you that to make money in the markets it is not necessary to “walk on the news”, try to predict the future of the stock market or be a very emotionally resilient person. And our idea of being is just an illusion. I'm not and I don't do any of the three. What I have learned from experience and years of following the equity markets is that feelings are not good advisers when it comes to making investment decisions and we should stick to our plan.
For this reason, one of the focuses of Future Proof is the IPS, Investment Policy Statement, where this medium-long term investment plan is outlined when we are cool-headed and emotionally calm. Crises will always come. It certainly won't be the last time markets fall 30 or 40% at breakneck speed.
A good investment policy, aided by behavioral analysis and self-reflection on how we would act in periods of strong declines, are essential, in my opinion, to achieve our medium and long term objectives through the markets. I would say that the first step to succeeding in the markets is to know ourselves, as well as our biases and limitations.
With a degree in economics (2006) and a postgraduate degree in Finance from Universidade Católica do Porto (2010), he later realized that he shared the same enthusiasm for programming.