skip to main content

The less I know the better

2020.3.17 Vítor Ribeiro, CFA

Initial note: article originally written in March 2017 and revised now taking into account the current situation.

 

It is common to hear people say that they do not invest in financial products because they do not have time to follow the market.

But is it really that important to have time to follow along? In this world of information and social networks, is having time the most important variable in this equation? Do we really have to know in real time what's going on?

In a long-term financial plan, time is in fact one of the most important factors considering the investment horizon(s) we have defined for our plan. But I doubt that having time to follow up is related to this plan. Rather, it is related to fear, negative information, the feeling of loss, lack of trust and even knowledge.

The idea that we might have some unpleasant surprise along the way is a sign of discomfort that prevents us from making the best decisions.

This is one of the reasons that lead an investor to delegate this difficult task of deciding to someone else. But the way in which he delegates is also intriguing as it is common to hear this statement said with confidence: "do as if it were for you!"

This statement is dangerous, risky and reckless. We are all different and in the way we save and invest we are very different.

The value of information is an undeniable fact, but the excess of information and a certain media circus creates in us the feeling that day after day we are worse off, that we can't trust anyone and that the best thing is to raise money from the bank or change from financial intermediary. We read everyday life with various biases caused by our incapacities and events more or less oriented towards fear and even panic.

If an insecure investor and cognitive lapses revealed by inability to analyze and process information had a certain position in financial assets on October 31, 2018 and were to consult his position on December 31, 2018, he would certainly have a shock. At that time, and depending on the type of personality and behavior, the investor would have taken the decision to sell partially or totally the assets to, according to him, avoid further losses.

However, if that same person had not consulted his position on December 31st but on October 31st (1 year later), the feeling would certainly be different but for the better. Assuming that you would have invested in the market a position in the MSCI World EUR index, the result would be positive, as can be seen in the chart below. The graph shows some of the events that have taken place in recent years and which have certainly created points of stress and mistrust.

Note: Click on the graphic to see it in large size

 

Of course, this is not always the case. Each economic and financial crisis is different from the previous one and always with great doses of unpredictability. But this basic and concrete example serves to highlight the other side, the important side of a correct asset allocation and the need to outline an investment strategy and policy.

We still don't know the real impact of this viral shock on the world economy. We know it's big, real and baffling. The damage is unavoidable and will change our lives. But I'm sure it will soon be another stress point on our journey. Life is not linear. The financial markets and the economy aren't either.

One of the main functions of an investment advisor is to avoid rash decisions. Information must be available, it is a sacred value, but our decisions must always be thought through, considered and in line with our goals, preferences and restrictions. Not just based on real-time information but based on predefined principles and policies. The investment adviser must be the guarantor of these principles.

Sometimes, in certain contexts and moments of noise, we have to recognize that there is value in venting: the less I know the better!

Vítor Ribeiro, CFA
Vítor Ribeiro, CFA

Vítor is a CFA® charterholder, entrepreneur, music lover and with a dream of building a true investment and financial planning ecosystem at the service of families and organizations.

All articles

+351 939873441 (Vítor Mário Ribeiro, CFA)

+351 938438594 (Luís Silva)

future@futureproof.pt

Future Proof is an Appointed Representative of Banco Invest, S.A.. It is registered at CMVM.

Menu