August 14, 2019

History’s lessons, Plan for Tomorrow

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Some years ago I became involved in using psychometric tools to analyse human behaviour in a financial context. Since then I have been more watchful of both individuals and group dynamics as people go about their daily routines. The skipping of breakfast, grabbing a coffee on the way into work, eating a sandwich at the desk, playing 5 a side football on the way home or the 9 holes of golf on early spring evening. Indeed, we all have our favourite TV programs for reasons that are specific to us.

Such routine has come about because it creates an effective comfort zone that we use to avoid reinventing our lives every day and as we grow older, these patterns become more comfortable. When it comes to managing our own financial affairs, however, it can cause problems. A case in point is the period of the last 10 years. In 2008 most Irish people were comfortable in the apparent knowledge that the Celtic Tiger was booming and there seemed to be no downside as the country enjoyed its longest period of prosperity. The falls in stock markets, post Lehman and Bear Stearns, has frightened many to forget that stock markets can and do actually recover. Our comfort zones have got shaken on both fronts. Too blind to see the downsides of both downward and upwards potential.

Such reversal of fortune is referred to as “regression to the norm” which most people would recognise by another phrase, a long term average. Crashing stock markets frighten many to run to the perceived safe haven of cash and cause them to forget that when markets recover the opportunity of significant gains far outweighs the returns that cash brings.

In recent months, the UK and most of Europe has experienced significant falls of snow. Yet despite the chaos that was encountered everyone knew that it would pass and good weather will come soon after resulting in blanket snow being a distant memory.

Stock markets are similar. We know that there will be chaos at some stage and yet we also know that there will be recoveries to be taken advantage of. We know this because history has consistently shown us that cycles happen in all things and for every poor experience there is a richer one around the corner.

For the cash hoarders out there (and there are a lot of personal investors and pension funds included in this label), despite all the fear of the notional losses you need to recognise the opportunity losses that occur from running from fear. 10 years on from the Lehman’s fallout, markets have now almost climbed back up to their all time highs. So it seems that time heals most investments but not those that are constantly kept in cash!

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