In most industrial settings, health-and-safety rules demand that appropriate protective gear be worn, including putting on ear defenders in high decibel environments. Yet, when it comes to our investing health and safety, we have little by the way of regulatory guidance. All we have to protect ourselves from the noise of market outcomes, is the familiar phrase ‘Past performance is no guide to future performance’, particularly when investing without the guidance of a financial/wealth planner.
Investing in markets is a very noisy business and some form of ear defenders are 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. Nobody knows (and do not believe anyone who claims to know).
One only needs to look at the monthly returns in any given year to see, there is a lot of noise in the markets. Essentially, the only ear defenders that we have are behavioural. We must keep our true investment horizons 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.
Even the returns of global equities on a yearly basis and of decades are noisy. Patience and fortitude are prerequisites for a successful investment experience. Yet, between 1970 and 2020, global developed equity markets have delivered a return of 10.9% on an annualised basis before inflation and 6.5% after inflation (albeit before costs). Put another way, investors who stayed the course doubled their purchasing power every 12 years.
With those sorts of longer-term returns, try not to let the noise of the markets keep you awake. Remember, market declines are always temporary, yet the advance is permanent.