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54.2 million worries

54.2 million worries – five ways to help manage the noise

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...and turn down the worry list

We are going through one of those periods where it seems there is a long list of things for investors to worry about: the US election; the Fed; ever present fears about a break of the Eurozone; and China.

To be sure these risks are real and in our view some combination of them could drive a short term correction in shares, but we don’t see them derailing the longer term rising trend in shares.

More fundamentally there seems to be a never ending worry list which is receiving an ever higher prominence as the information age enables the ready and rapid dissemination of news, opinion and noise. The danger is that this is making us all worse investors as we lurch from one worry to the next resulting in ever shorter investment horizons in the process. The trick is how to manage the noise to avoid this.

Why the worries might seem more worrying?

The problem for investors is that the worry list seems more worrying than it used to be. Yes, there is a fundamental element: the nominal return potential from most asset classes are lower than they used to be, global growth is slower than it was pre GFC and the world seems awash in geopolitical risks.

But there is a huge psychological aspect to this that is combining with the increasing availability of information, and intensifying competition amongst various forms of media for clicks, that is magnifying perceptions around various worries.

Firstly, people suffer from a behavioural trait that has become known as “loss aversion” in that a loss in financial wealth is felt much more distastefully than the beneficial impact of the same sized gain. This probably reflects the evolution of the human brain in the Pleistocene age when the trick was to avoid being eaten by a sabre toothed tiger or squashed by a wholly mammoth. This leaves us biased to be more risk averse and it also leaves us more predisposed to bad news stories as opposed to good news stories. Flowing from this, prognosticators of gloom are more likely to be revered as deep thinkers than are optimists. As John Stuart Mill noted “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.” In other words bad news and doom and gloom find a more ready market than good news or balanced commentary as it appeals to our instinct to look for risks around the corner. Hence the old saying “bad new sells”.

Secondly, we are now exposed to more information than ever on both how our investments are going and everything else. On the one hand this is great - we can check facts, analyse things, sound informed easier than ever. But for the most part we have no way of weighing such information and no time to do so. So it becomes noise. This comes with a cost for investors. If we don’t have a process to filter it and focus on what matters we can simply suffer from information overload. This can be bad for investors as when faced with more (and often bad) news we can freeze up and make the wrong decisions with our investment as our natural “loss aversion” combines with what is called the “recency bias” that sees people give more wait to recent events which can see investors project recent bad news into the future and so sell after a fall. A 1997 study by US behavioural economist Richard Thaler and others showed that providing investors in an experiment “with frequent feedback about their [investment] outcome is likely to encourage their worst tendencies...More is not always better. The subjects with the most data did the worst in terms of money earned.”

Thirdly, there is explosion in media outlets all competing for your eyes and ears. We are now bombarded with economic and financial news and opinions with 24/7 coverage by multiple web sites, subscription services, finance updates, dedicated TV and on line channels etc. And in competing for your attention, bad news and gloom naturally trumps good news and balanced commentary as “bad news sells.” So naturally it seems that the bad news is “badder” and the worries more worrying than ever.

Google the words “financial crisis 2016” and you get 54.2 million search results with titles such as:

  • “the looming financial crisis nobody is talking about…”;
  • “the pieces are falling into place for another financial crisis”;
  • “7 signs of a US economic collapse in 2016”;
  • “coming financial collapse – 18 critical items you need to prepare, tomorrow may be too late”;
  • “beware the great 2016 financial crisis”;
  • “looking for economic crisis 2016? Find everything you need here”;
  • “Trouble with money? The Bible has answers for you”; and
  • The Illuminati (are those guys still around?) are supposedly behind the “global financial crisis 2016-2017”.

The trouble is that there is no evidence that all this noise is making us better investors. Average returns are no higher than in the past. A concern is that the combination of a massive ramp up in 2 NOVEMBER 2016 EDITION 2 information combined with our natural inclination to zoom in on negative news is making us worse investors: more fearful, more jittery and more short term focussed.

Nine keys for successful investing

There are nine keys to successful investing (see http://bit. ly/1JmaIDU): 1. Make the most of the power of compound interest; 2. Be aware that there is always a cycle; 3. Invest for the long term; 4. Diversify; 5. Turn down the noise; 6. Buy low and sell high; 7. Beware the crowd at extremes; 8. Focus on investments offering sustainable cash flow; and 9. Seek advice. But of all of these, number 5 – or turn down the noise on the information flow around us, is critical – if you can’t do that there is no point getting advice, you won’t be a long term investor, you won’t get the benefit of compound interest, you will be sucked into selling low in every cyclical downturn, etc.

Five ways to manage the perpetual worry list

So here are five suggestions as to how to manage the worry list and turn down the noise:

Firstly, put the latest worry list in context. Remember that there has always been an endless stream of worries. Here’s a list of the worries of the last four years that have weighed on markets: the fiscal cliff; Cyprus; Fed taper talk; the US Government shutdown and debt ceiling debacle; Ukraine; IS terror threat; Ebola; deflation; Greece; China worries; Australian recession, property & banks; Brazil and Russia in recession; energy producers defaulting; manufacturing slump; Trump; worries about the Fed raising rates; soft starts to the year for US growth; falling profits; Brexit and contagion to the rest of Europe; North Korea; messy Australian election result; and South China Sea tensions.

Australian shares have climbed a wall of worry

sfp e2 graph 1

Source: ASX, AMP Capital


Yet despite this extensive worry list investment returns have actually been okay with average balanced growth superannuation funds returning 9.6% pa over the last four years and 7.4% pa over the last three years after taxes and fees.

The global economy has had plenty of worries over the last century, but it got over them with Australian shares returning 11.6% pa since 1900 and US shares 9.8%pa.

Secondly, recognise how markets work. A diverse portfolio of shares returns more than bonds and cash long term because it can lose money short term. As can be seen in the chart below while the share market can be highly volatile in the short term it has strong returns over all rolling 20 year periods. And invariably the short term volatility is driven by “loss averse” investors projecting recent events into the future and so causing shares to periodically from long term fundamental value. So volatility driven by worries and bad news is normal. It’s the price investors pay for higher longer term returns.

Australian share returns over rolling 12 mth and 20 yr periods

sfp e2 graph 2

Source: Global Financial Data, AMP Capital

Thirdly, find a way to filter news so that it doesn’t distort your investment decisions. For example this could involve building your own investment process or choosing 1-3 good investment subscription services and relying on them. Or simpler still, agreeing to a long term strategy with a financial planner and sticking to it. Ultimately it all depends on how much you want to be involved in managing your investments.


Fourthly, make a conscious effort not to check your investments so much. If you track the daily movements in the Australian All Ords price index, measured over the last twenty years it has been down almost as much as it has been up. See the next chart. It’s little different for the US S&P 500. So day to day it’s pretty much a coin toss as to whether you will get good news or bad. By contrast if you only look at how the share market has gone each month and allow for dividends the historical experience tells us you will only get bad news 35% of the time. Looking only on a calendar year basis, data back to 1900 indicates that the probability of bad news in the form of a loss slides further to just 19% for Australian shares and 27% for US shares. And if you can stretch it out to once a decade, again since 1900, positive returns have been seen 100% of the time for Australian shares and 82% of the time for US shares.

Percentage of positive share market returns

sfp e2 graph 3

Data from 1995 and 1900. Source: Global Financial Data, AMP Capital

The less frequently you look the less you will be disappointed and so the lower the chance that a bout of “loss aversion” will be triggered which leads you to sell at the wrong time. Try to avoid looking at market updates so regularly and even consider removing related apps from your smart phones & tablets.

Finally, look for opportunities that bad news and investor worries throw up. Always remember that periods of share market turbulence after bad news throw up opportunities for investors as such periods push shares into cheap territory.


About the Author Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Concluding comment

This article written by Dr Shane Oliver clearly demonstrates how we should act in the face of fear.

I’m now aged 54. I started investing in the share market when I was 12 and at that age thought I knew what I was doing. By the time I was 24 I was certain I knew what I was doing when it came to investing. Then came October 1987 which convinced me I didn’t know what I was doing.

So after the crash of 1987, some 29 years ago I started my path in Financial Planning. And, after watching and learning the markets for over 41 years, I can now confidently say I’m in a position to give great advice.

In short, you need to work with an experienced Planner who can sift through all the bullshit and clearly explain what is going on and the actions required for you to build and retain wealth.

The first step is to call us at Sydney Financial Planning. The second is to have an ongoing working relationship with your planner to ensure you don’t fail. If you are not a client yet, call us for an initial no obligation appointment.

If you are an existing client, keep doing what you’re doing.


Still have some questions?

If you want to discuss your income strategy or side gig idea with one of our advisors. Call us to arrange an appointment on 02 9328 0876.


Article by Bill Bracey | Senior Financial Planner


General Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Please seek personal financial advice prior to acting on this information.