Nov. 6, 2023
The name of this column, Cutting through the Noise, refers to the information that seems urgent, like news, headlines and what’s being talked about. Things like the political follies in Ottawa and Washington. Monthly economic statistics that bounce around like a three-year-old (and are revised a month later). The reporting of the U.S. Federal Reserve’s every word (and Chair Jerome Powell’s facial expressions). And of course, the speculation in advance of all these things.
There’s no question they’re urgent, but are they important? Will they make a difference to your investment returns?
In this column, I’ll sift through the urgent in search of the important. In doing so, I’ll lean heavily on investing principles that are as relevant today as when I started 40 years ago. I’ll use concepts like diversification, time frame, and valuation to provide perspective on current events.
I’ll also replace overused industry jargon like tactical, structured, enhanced, smart beta, sector rotation and index weight with words like objectives, asset mix, compounding, routine, fear, greed, and plenty of “I don’t know.”
There are three reasons for dusting off the trusty, old principles.
First, too many investors are picking products and advisers without an understanding of how investing and markets work. I’ve spent a good part of this year researching this topic, talking to people in all parts of the investment industry – advisers; planners; executives; regulators; educators; bloggers; and investors of all shapes and sizes. I asked them what the biggest impediment is to investors generating better returns.
There were recurring themes in the answers (no plan; performance chasing; FOMO; thinking their adviser knows more than they do), which led me to my overall conclusion that the wealth management industry, with all its sophistication, innovation, and size, has a serious problem. It’s built on a weak foundation.
Too often, investors are basing decisions on unimportant and/or unknowable factors, without appreciating what the tradeoffs are. They’re skipping over the basics and going straight to the good stuff – what’s new, what’s been working recently, and what’s urgent.
Second, even investors well versed in financial fundamentals are prone to what Morgan Housel of Collaborative Fund calls, “cyclical learning.” Unlike the medical profession that builds on past successes and failures to improve treatments and medications, it seems investors must relearn lessons each cycle. As Mr. Housel says, “Every five to seven years people forget that recessions occur every five to seven years.”
Wealth management is unusual in this respect. Mr. Housel again: “Cyclical knowledge, and the inability to fully learn from others’ past experiences, means you have to accept a level of volatility and fragility not found in other fields.”
The third reason is more optimistic. As an individual investor, you have a unique and valuable advantage. Your time frame is longer than any institutional investor. Longer than fund managers who have to cater to impatient clients and marketing departments. Longer than pension funds that must pass a solvency test every three years. Longer than endowments that have Donor and Board pressures. The investment committees making the decisions experience regular turnover which leads to changes in strategy and personnel. By having the same decision-maker and a longer time frame, you have a continuity that institutions can’t match.
This edge comes with caveats of course. To utilize it, you need to have a plan, and the patience and fortitude to stick to it. That’s the hard part and where this column comes in. You may need help staying steady when other aren’t. Doing what’s right for you when everyone else is heading in another direction. Sticking to the plan when you trust it the least.
This column won’t always say what you want to hear, and might even make you squirm or curse. For instance, I’ll be writing soon about a bright shiny object that’s taking some investors off course. I’m not referring to the next cannabis, crypto, or option strategy, but rather, Canadians’ favourite financial product, GICs.
Setting up and maintaining a simple investing strategy is mechanically easy but psychologically hard. My hope is that by cutting through the inevitable noise that goes along with it, you’ll be a little more disciplined and a lot more successful, which is compounding at its best.
This Globe and Mail article was legally licensed by AdvisorStream.