Aesop’s fable about the tortoise beating the hare provides a good analogy for investing.
The trouble with investing is market noise – most investors generally know that, with time, they are likely to pick up a premium for owning equities relative to holding cash or bonds.
Most investors also know that time helps to turn bad short-term market outcomes into positive long-term results and that it is costly to buy and sell investments, incurring tax and transaction costs.
Yet for all this evidence-based insight, investors still get spooked by the noise and uncertainty they face in the markets.
Currently, Brexit, Trump and North Korea are among the most obvious uncertainties but there is no shortage of negative headlines.
Many investors try to move their portfolios around because of short-term noise.
It seems baffling why but the answer lies in the way in which our brains are wired. We suffer a range of behavioural biases – immediacy, anchoring, loss aversion, over-confidence to name a few – which lead us towards being hares, rather than tortoises.
These can be extremely costly – a piece of work in 2015 revealed that fund investors give up around 2% per year through trying to time when to be in and out of markets and funds.
There has been much discussion in the news this year about new nominal highs in well-known stock indices in the US and Europe.
This leads me on to one of the questions most asked by clients: when markets hit new highs, is it time for investors to cash out?
History tells us that a market index being at an all-time high generally does not provide actionable information for investors.
By themselves, new all-time highs in equity markets have historically not been useful predictors of future returns.
While positive realised returns are never guaranteed, equity investments have positive expected returns regardless of index levels or prior short-term market gains.
Historically speaking, over longer time horizons, the odds of realised stock returns being positive have increased.
This is one reason why investors should consider investing a long-term commitment; staying invested and not making changes based on short-term predictions increases your likelihood of success.
Which brings us back to Aesop’s fable. Holding firm is likely to deliver a successful investment outcome for the tortoise without the activity and ultimate disappointment suffered by the hare.
Tips to help you win the race include avoiding looking at your portfolio too often, ignoring the news and recognising that in the world of investing, activity is nearly always in surplus.
And remember: “You may deride my awkward pace, but slow and steady wins the race”.
Ian Campbell, chartered financial planner, at Aberdeen firm AAB Wealth