Investing in a ‘Permacrisis’

The Collins English Dictionary has just announced its word of the year is ‘permacrisis’. Actually, I’d not heard the word used in everyday discourse either by friends and acquaintances, or even in the media. A permacrisis is ‘an extended period of instability and insecurity, especially one resulting from a series of catastrophic events’ and for many, will feel like a very difficult time to invest.

But the reality is, that through all the noise, the fundamentals of long-term investment still hold true. Agree a plan with your financial adviser, rebalance the investment portfolio regularly, but not too o en as that can get expensive, and have the conviction to see it through. This sounds simple enough, but as many of us will have experienced, taking this more measured approach doesn’t always come easy. Why?

What really drives our decision-making Behavioural finance is a relatively new area of theory. It shines a light on how investors make decisions in the ever-changing world of financial markets, challenging the traditional theories that suggest markets are rational and that investors generally make rational decisions. Findings show that it is in fact emotions and personality traits that are much more likely to drive investment behaviour and success.

Let’s take overconfidence, for example – a common personality trait that can dominate financial decision-making. An overconfident investor will believe they have more control over their investments than they actually do. This may have been borne out of a successful trade or taking profits before a downturn.

Studies in the United States, where personal investing is more embedded in the culture, show that like gambling (deliberate use of the word there) a self-investor, who has experienced some initial success, will believe that success can be repeated by continuing their active trading. However, these studies* also show that the over-active traders earned the lowest returns, compared to other more passive investors within the same retail brokerage. It’s therefore useful to have someone you can trust to help keep you in check. Acknowledging the role emotions play Another common emotion experienced by investors is fear. In some instances, it’s the fear of committing a lump sum investment for the long term and watching the market drop immediately a erwards. According to James Norton at Vanguard, this may lead to decision paralysis. They decide to wait for the right time, but that time never arrives. For those that do feel this fear, drip feeding amounts into the market from cash on a monthly basis can be a way of gaining exposure, while avoiding bigger losses, if markets did subsequently take a tumble.

When you consider that cash rates still lag way behind inflation, over the longer term having some money in the market is o en better than none at all.

We therefore must acknowledge that rational thinking doesn’t always drive our decision making, not least when we’re in a ‘permacrisis’ and that the best investment you can make will be some informed advice and a steadying hand.

*Barber & Odean 1999

Richard

Richard Simmonds Paraplanner