5 reasons why tinkering with your investments is doomed to failure

INVESTING, STOCK MARKET, WARREN BUFFETT, INVESTMENT PRINCIPLES, CAPITAL ASSET MANAGEMENT, LONDON

Modern life swamps us all with so much news, information, and punditry, that it is easy to be overwhelmed with a feeling of doom and gloom. The list of things to concern us peddled by the media is long and worrisome; Donald Trump, a nuclear-armed North Korea, an increasingly fractious Brexit process, rising inflation and a looming economic cliff edge, to name a few.

The natural extension of this is to worry about what the impact of all this uncertainty will have on your portfolio and, in turn, on your future wealth and expenditure goals. The first mistake is to believe that the world is falling apart around your ears. It most certainly is not. The second mistake is to think that your portfolio needs to be repositioned to mitigate these events. There are five key reasons why portfolio tinkering is unlikely to be a sensible course of action.

1. Today’s ‘unprecedented’ turmoil is no different to how it’s always been

Today’s worries dominate our thinking; but can you remember what you were worrying about a year ago, or five years ago? Consider the chart below. The overwhelming takeaway is to acknowledge the relentless upward trajectory of purchasing power for those who are patient and disciplined enough to stay the course.

Figure 1: The relentless growth of purchasing power, despite world events

Source: Albion Strategic Consulting

2. Bad news headlines sell – so don’t ignore the hidden good news

We are all aware that bad news sells. For example, the Office for Budget Responsibility (OBR) delivered a ‘gloomy’ forecast for growth of ‘only’ 1.4% for 2018. Yet, the UK economy is still growing; remember too that this slowdown comes after a period of growth that has outstripped much of the developed world – particularly the rest of the EU – for the past few years. It is not all bad news. Recent UK innovations like Skylon and Deep Mind buck the bad news trend.

3. The danger of conflation

Conflation is when two or more pieces of information merge into one. The human mind likes stories and in themselves these stories may lead to what appear to be rational outcomes on which some action could be taken. What we often fail to realise is that the seemingly logical outcome is highly unlikely; we have failed to multiply the probabilities of each sequential outcome together. Think hard about the stories you read and hear.

4. The futility of futurology

Futurology is simply astrology for the wealth management industry. From the IMF and the UK’s OBR to global investment banks, academia, and television reporters, all are peddling their own view of the future. These futurologists have one thing in common; they are nearly always wrong in their predictions and are rarely if ever held to account for their poor forecasts.

Research shows that whether it comes to predicting economic growth, interest rates, currencies, or the stock market, the only value of gurus is to make weathermen look good.

Ignore forecasts.

5. The news is already in market prices

It is normal to be worried about the potential impact of what is going on in the world and how this will affect your investment portfolio. The reality is that you are not alone; in fact, most investors have some views on how Trump, Brexit, Merkel’s problems in Germany, or the Federal Reserve in the US – to name a few – will impact bond and equity prices. These global, diversified viewpoints are already reflected in the price of company shares and government bonds, agreed freely between buyers and sellers.

If news isn’t being reflected in prices this may be due to insider trading, which is illegal.

Your investment portfolio is already structured to manage uncertainty

Today’s concerns are endlessly recycled through the 24/7 media sound bite process, alarming some investors. Well-structured investment portfolios seek to ensure that market conditions can be weathered, whatever the storm. Your highly diversified portfolio, balancing global equity assets with high-quality shorter-dated bonds, is well positioned to do so. No need to worry. Start by watching the financial news less frequently.

At Capital we believe that crystal balls and high-wire acts are for the circus.

Click here to read The 6 investment principles that will keep the odds firmly in your favour.

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