As January flies by, so do many well-intentioned resolutions. Unfortunately, much of our behaviour becomes entrenched. But it may be easier to change investment habits. There is still ample time in 2020 for new disciplines to pay off. Two simple rules might help in a year with plenty of risk to spread around.
Portfolio risk appetite and trading decisions are often driven by the news we consume. It can distract us from a supportive economic background or from sticking to our investment strategy. We easily forget that markets could climb the wall of worry through 2020, as happened last year. It seems that central banks and politicians have determined that policy should be as accommodating to stock markets as possible. But there is still the same space in newspapers and other media to fill. Even if staying invested is the right strategy, nasty surprises seem to demand a response. It is tough to avoid a knee-jerk trade when headlines scream about the consequences of president Trump’s latest tweet. At the same time, mainstream media tends to be consensus-driven and may be slow to pick up on the new developments that really matter.
The wrong choice of news sources can leave an investment manager focused on unoriginal opinion packaged with a lot of noise, while missing out on unexpected developments that should be of genuine interest or concern. In the run-up to the financial crisis, a few commentators and blogs were drawing attention to the debt market and banking problems, but little of it made headlines or got attention from mainstream news. The information that investment managers needed was hidden in plain sight – publicly available, yet just not circulating.
A good resolution is to identify some additional news sources that could signal an interesting change. Certainly, there are investment gurus who attempt this, but their own commercial necessity to deliver regular content and appear knowledgeable can undermine their originality. Useful sources need not be costly. The best ones attract a lot of informed feedback that add value. It is also important that commentators are not being contrarian simply for the sake of it. There are many professional doomsters who, like the proverbial stopped clock, are occasionally right, usually wrong, and not at all useful. What investors need are rare insights, and forced exposure to some unconventional thinking. Developing a good risk framework involves exploring all the possible scenarios. False comfort can come from relying on the officially-prescribed risk modelling that focuses on past market sell-offs. Stock volatility itself gives little insight on risk.
The most helpful contrarian sources are likely to focus on the finance sector – banks and lending, in particular. But there are other geopolitical, social and economic developments that are worth monitoring. For example, some political developments have been well signalled by currency and real wages.
The second resolution is encouraged by cost pressures, but should be seen as a positive in its own right. Reducing trading activity can avoid some of the volatility-driven portfolio change that is simply a response to noise. Unfortunately, too much attention is typically given to portfolio concentration as a signal of fund manager confidence. More focus on portfolio turnover and investment holding periods might be worthwhile. This should apply both at the stock level within portfolios and also at the wealth manager level in switching between managers. Less churning of portfolios and funds will need new explanations for clients. But all could benefit from better ways of thinking about news flow and stock market volatility.
Investing temperament is hard to change, but being more purposeful about our exposure to news sources can help. It is too easy to let our comfort zone determine what we give attention to: good investment practice needs to be challenged. It is still not too late to make some changes to behaviour that could pay off as the year unfolds.
A version of this article was published on Citywire Wealth Manager on 24/01/2020.