Different Horizons for Successful Investing
“World stock markets have rounded off a wild and difficult year,” the article began, pointing to multiple uncertainties in a polarised US political system, a crisis–ridden Eurozone and a rapidly
slowing Chinese economy.
Does that sound familiar?
That was from a calendar year wrap–up of markets published by BBC News on 30 December 2011, more than seven years ago. (1)
The report itself was accurate enough. In fact, it was a fair reflection of some of the sentiment dogging financial markets at that time. The US had lost its ‘AAA’ credit rating that year after a congressional deadlock over the debt ceiling. In the Eurozone, the focus was on the heavily indebted members Portugal, Ireland, Italy, Greece and Spain and the future of the currency union. In China, the government was clamping down on lending and investment to cool inflation.
Now, seven years on, markets confront a new set of uncertainties—trade tensions between the US and China, the fate of Brexit, domestic political polarisation in the US, the rise of populist movements in Europe and sundry geopolitical flashpoints. Yet, in the time between the 2011/12 headlines above and the 2018/19 ones, global equity markets (as measured by the MSCI World IMI Index in Australian dollar terms) have risen for seven consecutive years for an annualised return of 15%. To be sure, those returns over seven years have not been distributed evenly. In 2018, for instance, global equity markets were as good as flat in Australian dollar terms, while in 2013 they gained by close to 50%.
But the point is that markets do not move in a straight line. News travels quickly and prices can adjust in an instant, up or down. When there is more uncertainty, there is often more volatility. Individuals who seek to anticipate what markets will do next based on today’s news just add unnecessary anxiety and risk to the process.
By necessity, the media’s horizon when it comes to financial news is very short term. If you are publishing in real-time, your need for fresh material is insatiable. It’s not that these headlines are wrong. But for an individual investor, whose horizon is measured in years or even decades, day–to–day news is less relevant.
This means that while the daily news flow may be worrying at times, it pays to reflect on the fact that capital markets have rewarded long–term investors. For this, what is required is discipline and a focus on the elements within your own control. None of us can control the news and the daily ups and downs of markets. But you can, with the help of an advisor, build an investment plan that fits your needs and risk tolerance. You can structure a portfolio built around the long–term drivers of expected returns. You can diversify globally, and you can manage your expenses, turnover and taxes. Finally, you can manage your own responses to the news.
Volatility and uncertainty go hand in hand with investing. There will always been something in the news that is worrying. But rather than acting on it, why not leave the markets to do your worrying for you and focus on the horizons that are meaningful for you?
(1) ‘World Stock Markets End Tumultuous Year Well Down’, BBC News, 30 December 2011
This article has been prepared and is provided in Australia by DFA Australia Limited (AFS Licence No.238093, ABN 46 065 937 671). The article is provided for informational purposes only. Any opinions expressed in this article reflect the authors judgment at the date of publication and are subject to change. No account has been taken of the objectives, financial situation, or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly. ©2019 Dimensional Fund Advisors LP. All rights reserved.