In day-to-day life, we tend to make a connection – largely correctly – that you get what you pay for. Yet when it comes to investing, broadly speaking, the exact opposite applies.
Different parts of the market do well at different times, but no-one really knows who the future winners are, not even the professionals. Naïve investors take good short-term performance as a sign of skill.
What do we fear most? A falling coconut whilst sitting in the shade of a coconut tree or running into Jaws whilst in the sea? Humans are irrational and find it hard to place risks in perspective, in part because they involve numbers (which many people hate), are influenced by fear or recent news and often depend on the way in which they are framed, to name just a few of the challenges.
Leverage, often referred to in investing as a ‘double-edged sword’, is another word for borrowing money to own more of an asset. Much like a mortgage on a house, it enables individuals to own a higher value of an asset they would otherwise be unable to own, but it does run the risk that the value falls such that one ends up owing more than one owns (coined ‘negative equity’ in the housing world). This is never a good place to be.
Complex problems rarely have simple, binary choices. All choices require trade-offs. The reality is that most of us want to take steps in the right direction, particularly around climate change in all aspects of our lives and struggle with the trade-offs we face.
In the past twelve months, we have been reminded of some useful lessons that can – hopefully – make us all better investors. Several key lessons stand out for us.
The word ‘ahoy!’ is an old maritime warning, usually used when either a ship or land was sighted in the distance as a warning to the crew to beware. Today, the risk of higher inflation down the line has been sighted by both economists and – of late – the markets.
“As an investor, it is generally not a bad idea to ignore what is going on in your portfolio most of the time. At the very least it can be distracting and at worst it can be a source of unnecessary anxiety. That advice is as applicable today as it ever was.”
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