Block out the noise of markets

Investors can be prone to distraction and focusing on past performance. Dr Benjamin Holdsworth shows why caution is needed.

In most industrial settings, health and safety rules demand that the right protective gear be worn, including donning ear defenders in high-decibel environments. 

Rear-view mirror investing is not the best way to build portfolios for the future, which is where our spending and inter­-generational transfers will take place

Yet, when it comes to our investing in health and safety, we have little by the way of regulatory guidance except the obligatory phrase ‘Past performance is no guide to future performance’ to protect ourselves from the noise of market outcomes. 

Investing in markets is a very noisy business and some form of ear defence may be required. 

Given that markets do a pretty good job incorporating information into prices, they tend to move randomly on the release of new information.

Many investors are probably wondering today what returns will be like from equities in the final months of 2020 and perhaps next year too. However, nobody knows – and do not believe anyone who claims to know. 

The only defence that we have is behavioural. We must keep our true investment horizons – 20 to 30 years or more, in many cases – at the forefront of our minds, accept that investing is a ‘two steps forward and one step back’ process and not look at our investment portfolios too frequently. 

Rear-view mirror