WARREN INGRAM: Predictions of little use when managing money
Investors who stay invested through all market conditions tend to be better off than those who change constantly
At the start of every year we are inundated with predictions in the media about the year ahead. Inevitably, the most rational and balanced views take a back seat, as the scariest and boldest predictions always get the biggest headlines.
While I understand the human dynamic that drives this behaviour, I am always amused at how people take these bold predictions as fact.
In truth, human beings cannot even accurately predict the weather in the next 24 hours, making it more improbable to predict political, economic or investment events.
My reasoning is simple, weather forecasters don’t need to factor in human behaviour (in the short term) and still they are inaccurate. How can anyone then expect better when you add the impact of irrational humans?
There is no truer words spoken than by Lao Tzu, sixth-century BCE Chinese poet: “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.”
In the next few weeks, months and years there are some big events likely to have an effect on economies and markets. These include National Treasury’s annual budget, the Moody’s rating announcement and the US elections in 2020. In 2021, we have the municipal elections and in 2022 the ANC elective conference followed by the SA national elections in 2024. Globally, we need to consider Brexit and US President Donald Trump’s trade war with China.
While we know about these events, we don’t know how things will pan out, nor do we know how investors will react to these outcomes.
We also know that there will be many surprises in the months and years ahead. Consider the US drone strike on Iranian General Qassem Soleimani and the retaliation by Iran. That could have triggered a much bigger conflict that might have sent commodity prices rocketing.
Those who have knowledge, don't predict. Those who predict, don't have knowledge.Lao Tzu, 6th Century BC Chinese poet
In a global political environment where Trump, Russian President Vladimir Putin, and Bank of Japan are factors, there is a good chance that they will do something irrational that might affect markets.
Here Nobel laureate in physics Nils Bohr’s statement rings true: “Prediction is very difficult, especially if it’s about the future.”
In short, no forecasts should be taken seriously, accept for the entertainment value. It is a terrible idea to manage your investments according to any bold forecasts, as they are almost certain to be wrong.
So, if it is pointless to manage your investments using forecasts, then how should you manage them?
Rather create an investment strategy built around your personal circumstances and goals. For instance, when determining what proportion of your investments to hold offshore, you should start with your own life plans. For example, are you planning to stay in SA? If so, you need to maintain a portion of your capital in the country to fund your expenses. If you are likely to emigrate, you should increase your offshore allocation so that you have little invested in SA.
Those who have children might also increase their overseas allocation as their children might need to study overseas. In addition, if you have more money than you will spend in your lifetime, you should increase your overseas allocation as you need to plan for a much longer investment horizon, for example for your children and potentially their children.
Your age also plays a factor in your financial decisions — if you are young, you have more time to take on investment risk than someone who is already retired with limited possibilities of earning more income.
The other factor that plays a big role in your investment decisions, is your tolerance for volatile conditions. If you have a large portion of your investments in shares, you need to be comfortable that your investment values will drop every few years. When this happens, you cannot sell because you are not comfortable with losses. That means you need to have the right mix of assets all the time.
People often ask if I consider market conditions and the economic climate when making investment decisions. They certainly are factors in my decision, but not significant. In my opinion the factors mentioned above are much more important.
However, I will be careful about buying or selling investments in volatile times. That does not mean I will do nothing, rather I would phase my purchases or sales over time. If you consider sending money offshore, you must not send all your money in one batch — a sane strategy would be to send it out in equal batches over six to 12 months.
If the stock market is volatile (nearly a permanent state), I would also buy or sell shares in batches over time. This has the effect of limiting the effect of a big market move that could set you back at the start of your investment period.
Once you have the right mix of assets, you would certainly not sell out of them simply because of a headline or tweet. Investors who stay invested through all market conditions tend to get much better performance than those who change constantly.