By Debra Slabber
In a world of information overload, social media, the increasing size of the investable universe, cryptocurrencies and Robinhood trading – to name a few – it can be easy to get distracted from what is important. With so much market noise, it has become more important than ever to identify the things investors should NOT care about. We outline our top five:
1. How rich ‘The Kandasamys’ are
Lottery ticket stocks will always have buyers. Why? Our brains are wired in such a way that expecting to make money feels even better than the act of making money itself. It’s the anticipation that puts your brain on high alert. This is also why gamblers are rarely satisfied with a single win. Your brain always needs another shot of dopamine to get that high again. The temptation to speculate increases when we watch others around us getting rich.
Unfortunately, the stories of individuals starting a ‘tech company’ and selling it for billions, are the exception, and not the rule. Going from zero to zillionaire isn’t the order of the day and the reality is that, for most of us, we need to build our wealth over time, through diligently saving and investing our hard-earned money.
There will always be people with more success, prestige, money and accolades than you. The important thing when it comes to money and investments is to play your own game and to be good at your own game.
2. The amount of time you spend on your investments
How many hours does it take to master a skill? According to Malcolm Gladwell, in his bestselling book Outliers, “10 000 hours is the magic number of greatness”.
Unless you are planning on becoming an expert, there is no need to spend hours of time and effort on your investments. Rather focus on improving the skill set that is generating your income.
In many areas of life, trying and/or working harder leads to better results. That’s not necessarily the case when it comes to investing. Once you have made peace with the fact that your investment is going to take 20-30 years to build, it is actually very boring in-between. Let it be boring: that is when the good stuff is happening.
3. How smart you are
When it comes to investing, the biggest assets to use to your advantage are your behaviour and temperament. Warren Buffett once said: “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
A study published in November 2016 in the Proceedings of the National Academy of Sciences showed that a high level of innate intelligence is not an indicator of financial success. The study found that personality plays a much bigger part than IQ.
4. Timing the market perfectly
The biggest problem with timing the market is that we have no idea when stocks will bottom or when they will climb. Maybe stocks will bottom today? Maybe it will climb next week … or in a year. Who knows? Will you invest at the absolute bottom? Not unless you’re ridiculously lucky. But the point remains that the bigger the losses, the higher the expected returns thereafter and, unfortunately, the biggest up days are normally very close to the largest down days. As the saying goes, a river cuts through a rock not because of its power, but its persistence. Time in the market remains superior to timing the market.
5. The short-term performance of your investments
American economist Robert Shiller said that one year is the time it takes for the Earth to go around the Sun and that it has no other significance. Especially when it comes to investing.
As investors, we naturally want the best performing portfolio and believe this is what will make the difference in our journey to wealth creation. Yes, performance is important, particularly when monthly contributions are small, but what is more important than performance, is a consistent contribution and the time you allow your money to grow.
As boring and uninspiring as that may sound, there is something fabulous about it too. Regardless of how much you invest, if you just have the patience to let your investment compound and the discipline to continue saving through good, bad and boring times and not get distracted, you will be amazed by the power of compounding over time. It is in fact, the eighth wonder of the modern world.
In conclusion
You don't have to outsmart the market if you can simply outperform it. Cut through the confusion and noise and focus on what actually matters – a simple, consistent diversified approach over the long term.
While noise and speculation can act as an emotional rollercoaster, your goals are unlikely to have materially changed and, therefore, your plan shouldn’t either. So, if you catch yourself getting down about the state of the equity market, trying to predict what’s next, or getting bored with your investments, always remember why you are investing in the first place.
Debra Slabber, a Chartered Financial Analyst, is a portfolio specialist at Morningstar Investment Management South Africa.
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