Your investments and the news

There are two important factors that intersect and influence how we view the world, and our investments.

First, the constant noise. Whenever we write about investment markets and the economy- and this has been true for us for 25 years- there is always something happening that has an influential impact on the markets and short term investment returns. These events or factors are often described as extraordinary, but if we take a step back and look at the longer term, we see there is a consistent sequence of events, one after the other. Some are positive, some negative.

The second is our recency bias. This means we ascribe more importance to events that are happening now, but will quickly forget them when the next items in the news cycle arise. As an example, here in mid-2024, there are very few people talking about the market drop of February 2020, although at the time it was grabbing all the headlines.

Within this context, it challenges us to think how one should manage their investments in a constantly changing environment.

Perhaps the first step is acceptance that there is always something happening; as one of my undergraduate lecturers used to state, “normal is just the mean of abnormal”. 

Thereafter, for us at Black Swan Capital, it is a reinforcement of our objectives-based approach to investment management. This means not trying to predict the next hot thing, and certainly not to chase last week’s or last year’s top performers, but to manage assets in a tactically adjusted diversified manner that is built around the best way to help you achieve your goals. By being focused on what you are trying to achieve can help remove some of the noise of short term market movements.

To support this, here are some illustrative examples from the most recent Q2 2024  JP Morgan Guide to the markets report.

One of the big factors influencing investors is managing risk versus volatility. We consider them to be two very different factors.

We define volatility as market price movement, up or down, from one period of time to the next. This means your asset may be worth more or less than yesterday or tomorrow.

Risk however, is the possibility of your asset becoming worthless, of you losing all your money.

One way to manage volatility and reduce risk is by diversification, which is to spread your investment across a number of different types of assets. The other reducer of volatility, or risk of a negative return is time. The graph below shows the reduction of risk over time by diversification across all timeframes. This data analysis shows that since 1950 there has never been a negative 10 years rolling return for a 50% equity 50% bonds portfolio. Even a 100% equity portfolio has not generated a negative return over any rolling 20-year period. In short, time reduces risk of a negative loss and diversification can reduce volatility.

This is important when we apply it to the influence of market noise and an over focus on current events. Consistency across a longer period of time can generate more consistent returns and avoiding reacting to the ever-present short-term events might stop you from make decisions you could regret.

This highlights that assets with higher growth potential in the longer term have more volatility in the short term, and therefore risk of short term losses. Over time however, they tend to outperform. Another way of stating this is lower risk equals lower return and higher risk equals higher return. If you opted for the security of cash, it is a false security as you would not have kept pace with inflation and therefore eroded your real value.  

This is shown below.

These illustrations showing actual market data are a good reinforcement of how to manage your money over time, and the importance of staying focused on your goals. Remember that markets go up and down over time and in the long term trend up, and that is the wealth accumulation that helps you to achieve what you are setting out to do.

If you would like to discuss your situation, your goals and objectives and how to achieve them, reach out to us and we will be happy to speak with you.

And, if you know someone that might find this information useful or could benefit from our advice, please send them this article and put them in touch with us. We are here to provide good advice and to help international professionals to make good financial decisions. Contact us at info@blackswancapital.eu.