Coffee Break: Avoiding Stupidity

Jim Parker, from DFA Australia Limited, shares some more useful insights and links:

Coffee Break: Avoiding Stupidity It’s often overlooked, but the difference between having a successful investment experience and an unsuccessful one often comes down not so much to acts of brilliance but to avoiding acts of stupidity. Coffee Break this week, drawing on the findings of behavioural finance, looks at why simple discipline and avoiding rash decisions can be so important to improving your chances of a good investment outcome. Stop Relying on Brilliance One of the most popular quotes from Charlie Munger, the long-term partner of legendary investor Warren Buffett, is that it is remarkable how much advantage he and Buffett have achieved by consistently trying not to be stupid instead of seeking to be smart. This article from the blog Farnam St explains the difference. It’s nice to be brilliant, but often the best thing you can do as an investor is just avoiding doing stupid things. http://bit.ly/2M0obiZ Why Smart People Make Dumb Mistakes Feelings and hunches are usually not a good guide to long-term investment decisions. We tend to over-rate our own competence and give too much weight to recent events. This blog post from Psychology Today lists eight common behavioural biases behind dumb money decisions. Why do smart people make dumb mistakes with their money? Here are eight common behavioural biases. http://bit.ly/2WrHu9e Why Do We Make Stupid Investment Decisions? Although markets are awash with randomness, there are vital and often simple cues that investors choose to ignore. A common one is overlooking signal for noise. In other words, people get distracted by headlines and miss the long-term returns available through discipline. Here are eight reasons stupidity is so common. What are the major factors driving stupid investment decisions? Here are eight common reasons people go astray. http://bit.ly/2HTcatN au.dimensional.com This section may provide links to the sites of independent third parties which contain information, articles and other material prepared by persons who are not employees or representatives of DFA Australia. These links are for your convenience only. These third parties are not affiliated with DFA Australia, and DFA Australia does not control or endorse and is not responsible for any information, opinions, representations or offers on these linked sites. DFA Australia is not responsible for the contents or accuracy of this material, and the opinions expressed in this material should not be taken to be the opinions of DFA Australia.

Coffee Break: The Crystal Ball Fallacy

Jim Parker, from DFA Australia Limited, shares some more wonderful insights and links:

As a new year begins, the financial media typically is full of speculative commentary about what the coming 12 months will hold for markets. The assumption underlying this content is that someone, somewhere has a reliable crystal ball. The truth, however, is that everyone is guessing. A few guesses turn out to be right. Most turn out to be wrong. And that’s because those making these forecasts fail to account for the random nature of events. Ultimately, it’s not a good way to invest.

Wrong, Random or Worse Everywhere you look at this time of the year, someone is telling you what stocks to buy in 2019, the chances of a recession, the likely path of interest rates and what will happen to currencies. These forecasts are really guesses and are often just a pitch to get you to trade. In fact, Barry Ritholtz sees forecasting as an exercise in futility. The problem with market forecasts goes beyond their inaccuracy. The real issue is their failure to recognise the randomness of the world. https://bloom.bg/2QBfQUf

The Market in Fear Have you noticed how much media commentary about the market outlook is gloomy? We’re told to brace for everything from meltdowns to depression. Part of this is economic, as research shows human beings are wired to give greater weight to bad news than good. This means there’s an in-built market for fear. Our in-built loss aversion makes us more likely to click on bad news headlines. Keep that in mind when you are confronted with 2019 ‘outlooks’. http://bit.ly/2RzZsDV

Separating Noise from Signal So much media commentary around markets is just noise. For example, at the start of every year you’ll see articles saying it’s now “a climate for stock pickers” or that “the rules have changed”. Veteran investor and fund manager David Booth has heard it all and provides a refreshing perspective on market forecasting. Market forecasts are ubiquitous around this time. But this veteran fund manager says most are just noise designed to get you to trade. http://bit.ly/2REnm1e

DFA Australia Limited 

This section may provide links to the sites of independent third parties which contain information, articles and other material prepared by persons who are not employees or representatives of DFA Australia. These links are for your convenience only. These third parties are not affiliated with DFA Australia, and DFA Australia does not control or endorse and is not responsible for any information, opinions, representations or offers on these linked sites. DFA Australia is not responsible for the contents or accuracy of this material, and the opinions expressed in this material should not be taken to be the opinions of DFA Australia.

Michele Scarponi, you are in our hearts...

Coffee Break: Lest We Forget In the face of constant 24/7 news headlines, reflective moments like those offered on Anzac Day each year remind us that the most significant things in life are not necessarily what happened in the last five minutes. A similar long-term focus is required in the world of investment, where our attention is constantly dragged from one instant headline to the next. That’s why taking a break from the news media can serve as a tonic for frayed nerves. Giving Up on News While news is a source of instant information, it rarely provides meaning. That comes from longer-term reflection and analysis and an awareness of slow-moving, but deeper, change. Indeed, this article suggests that taking a break from the instant hit of fast news can ease anxiety, promote insight and restore a long-term focus. The news isn’t just bad at the moment. It’s bad for you. So why not take a break? http://bit.ly/2ppfqme Get Your Life Back Have you ever calculated how many hours you spend scanning headlines on Facebook or watching financial news or getting grumpy reading about politics? This writer did and was shocked by the result. In this article, he argues you should see news mainly as entertainment geared to keep you watching so that it makes money. Depressed by the news? That’s the point. The aim of the media is to keep you watching. http://bit.ly/2oiT8Pj Quantity Vs Quality There is no shortage of instant information these days. The bigger question is over the quality of what’s on offer. The firehose of news and opinions about the news threaten to overwhelm many investors. In response, this writer suggests two responses—taking a historical view and filtering out the noise. Overwhelmed by news headlines? Take a broader view and filter out the daily noise. http://bit.ly/2pLC3xH

Coffee Break: Brexit Special

By Jim Parker, Vice President, DFA Australia Limited By virtue of necessity, the media works on a day-to-day horizon when covering financial markets. For most investors, though, the more important horizon is measured in a matter of years. Referendums like “Brexit”, elections and geopolitical events can look momentous if you assess them via the short-term market reaction. But taking a step back from the noise can also provide a much needed perspective. Years Not Days When markets fell heavily after the recent Brexit vote in the UK, one US advisor was awoken by a client shouting down the phone that the Dow was down 500 points. The advisor’s response is a classic case of the benefit of not fixating on daily moves in the indices. Day-to-day market moves may be interesting, but they may not be so important if your horizon is in years. http://nyti.ms/28ZEy9a Give Your Portfolio a Rest Brexit, China, oil, elections, negative interest rates….there seem to be plenty of news headlines to lose sleep over at the moment. So what do you do? As it turns out, the same rules of thumb we use to improve our own sleeping habits can be applied to our investment portfolios. With all the worrying news in the world, is your portfolio getting enough sleep? http://bit.ly/28Z6mJ0 Take a Deep Breath When markets are volatile, there can be an overwhelming urge to “do something”, but what exactly? There are as many opinions out there as there are portfolios. But what if you just took a deep breath and didn’t do a thing? This writer provides eight useful points of perspective. When markets are rocky, the immediate impulse is to “do something”. But there’s a better response. http://nyti.ms/293tHOA

Jim Parker's Coffee Break: Sticking to the Plan

It’s been a volatile start to 2016 in financial markets. Worries over China, US interest rates and falling commodity prices have unnerved many investors. How should you respond to all those scary headlines? This week’s Coffee Break highlights the importance of having a financial plan…and sticking to it. Listen to Your Plan One large investment bank says “sell everything”. Another says “this is a buying opportunity”. Who should you listen to at a time like this? In his latest New York Times column, Carl Richards suggests this is when having a clearly articulated financial plan pays off. Market volatility can be hard to take. But having and sticking to a financial plan can make the ride easier. http://nyti.ms/1OXg0d4

Responding to Volatility It’s understandable that people feel helpless and confused during periods of extreme market volatility. But there are a few things you can do to ease your nerves, like turning off the TV, looking at your big picture and reacquainting yourself with your financial plan. Robin Powell explains. Tough markets can trigger unwelcome emotions. Instead of acting on them, why not review your investment plan? http://usat.ly/1JD2mPv It's Not All in the Timing A common temptation during down markets is to retreat to cash until the storm passes. It sounds good on paper, but people who attempt to time the market often forget they have to get two decisions right—when to get out and when to get back in again. The better decision is often to do nothing. Thinking of timing the market to wait out the volatility? Remember, you have to get two decisions right. http://yhoo.it/1RMgAA9 Jim Parker is a VP with DFA Australia Ltd and kindly allows us to share his weekly newsletter

Nimbus Independent: After The Sky Falls Trailer

After The Sky Falls Trailer from NIMBUS INDEPENDENT on Vimeo.

The Patience Principle

Jim Parker, Vice President, Dimensional Australia

Global markets are providing investors a rough ride at the moment, as the focus turns to China's economic outlook. But while falling markets can be worrisome, maintaining a longer-term perspective makes the volatility easier to handle.

A typical response to unsettling markets is an emotional one. We quit risky assets when prices are down and wait for more "certainty".

These timing strategies can take a few forms. One is to use forecasting to get out when the market is judged as "over-bought" and then to buy back in when the signals tell you it is "over-sold".

A second strategy might be to undertake a comprehensive macro-economic analysis of the Chinese economy, its monetary policy, global trade and investment linkages and how the various scenarios around these issues might play out in global markets.

In the first instance, there is very little evidence that these forecast-based timing decisions work with any consistency. And even if people manage to luck their way out of the market at the right time, they still have to decide when to get back in.

In the second instance, you can be the world's best economist and make an accurate assessment of the growth trajectory of China, together with the policy response. But that still doesn't mean the markets will react as you assume.

A third way is to reflect on how markets price risk. Over the long term, we know there is a return on capital. But those returns are rarely delivered in an even pattern. There are periods when markets fall precipitously and others where they rise inexorably.

The only way of getting that "average" return is to go with the flow. Think about it this way. A sign at the river's edge reads: "Average depth: one metre". Reading the sign, the hiker thinks: "OK, I can wade across". But he soon discovers the "average" masks a range of everything from 50 centimetres to five metres.

Likewise, financial products are frequently advertised as offering "average" returns of, say, 8%, without the promoters acknowledging in a prominent way that individual year returns can be many multiples of that average in either direction.

Now there may be nothing wrong with that sort of volatility if the individual can stomach it. But others can feel uncomfortable. And that's OK too. The important point is being prepared about possible outcomes from your investment choices.

Markets rarely move in one direction for long. If they did, there would be little risk in investing. And in the absence of risk, there would be no return. One element of risk, although not the whole story, is the volatility of an investment.

Look at Australian share market's benchmark S&P/ASX 300 accumulation index. In the 35 years from 1980 to 2014, the index has registered annual gains of as high as 66.8% (in 1983) and losses of as much as 38.9% (in 2008).

But over that full period, the index delivered an annualised rate of return of 11.6%. To earn that return, you had to remain fully invested, taking the unsettling down periods with the heartening up markets, but also rebalancing each year to return your desired asset allocation back to where you want it to be.

Timing your exit and entry successfully is a tough ask. Look at 2008, the year of the global financial crisis and the worst single year in our sample. Yet, the Australian market in the following year registered one of its best-ever gains.

Now, none of this is to imply that the market is due for a rebound anytime soon. It might. It might not. The fact is no-one can be sure. But we do know that whenever there is a great deal of uncertainty, there will be a great deal of volatility.

Second-guessing markets means second-guessing news. What has happened is already priced in. What happens next is what we don't know, so we diversify and spread our risk to match our own appetite and expectations.

Spreading risk can mean diversifying within equities across different stocks, sectors, industries and countries. It also means diversifying across asset classes. For instance, while shares have been performing poorly, bonds have been doing well.

Markets are constantly adjusting to news. A fall in prices means investors are collectively demanding an additional return for the risk of owning equities. But for the individual investor, the price decline only matters if they need the money today.

If your horizon is five, 10, 15 or 20 years, the uncertainty will soon fade and the markets will go onto worrying about something else. Ultimately what drives your return is how you allocate your capital across different assets, how much you invest over time and the power of compounding.

But in the short-term, the greatest contribution you can make to your long-term wealth is exercising patience. And that's where your advisor comes in.

Market Meltdown, Bloodbath and Armageddon Headlines

Jim Parker, from Dimensional, has put together a special one-off edition of the Coffee Break brings together some useful perspectives on current market volatility. 

Coffee Break: Avoiding Meltdown

It’s one of those rare times when financial news moves from the business pages to the front page. “Market meltdown” makes for a great headline. But for individual long-term investors the biggest danger is an emotional meltdown. [Click on headings or use links below.]

Five Things NOT to Do Now Deep economic and market analysis are not really what most investors need at times like this. Instead, the most useful attributes are discipline, diversification, patience and self-knowledge. Veteran journalist Jason Zweig, who’s seen it all before, lists five things you shouldn’t do now. http://on.wsj.com/1LtSBjF This Too Will Change Market volatility can be hard to take, but the more attention you pay to day-to-day fluctuations the more your emotions take over. If you need the money tomorrow, you might have cause to worry. But for most of us, there will be many more market cycles to come. So don’t watch.  http://theatln.tc/1JvXUPZ Don’t Follow the Herd With our exposure to China, Australia has been caught up in the market falls. Dipping into and out of the market may seem tempting at this time, but listen to another veteran financial journalist Michael Pascoe. People who panic only risk making it worse for themselves. http://bit.ly/1PO2Kcm