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Most investment research recommends what did work. Consider, for example, the wave of 2022 articles that touted inflation hedges. A typical case was this May 2022 article, which featured eight potential investments. Six appear below. The other two suggestions (exchange-traded funds and mutual funds) were too vague to analyse.
• Commodities;
• Stocks;
• Real Estate;
• TIPS;
• Cryptocurrencies.
Stocks were something of an odd choice, in that a) they had fallen during early 2022 precisely because of inflation, and b) they were mainstream investments.
Buying more equities would not have improved portfolio diversification. However, their inclusion was valid: Over time, most stocks do ward off inflation, because companies pass their increased costs along to their customers as price hikes.
The article’s timing was less than ideal. Since that article was published, the only one of those assets to outpace inflation was the item that most investors already owned: US equities. Everything else either lost money outright, or in bitcoin’s case, eked out a tiny gain but nevertheless lost ground to inflation.
What the People Want
I point no fingers. My purpose in citing this article was not to identify bad journalism. The author’s recommendations were generally sound, written in response to logical fears.
Besides, the author had merely given readers what they wished. At the time, investors eagerly sought advice about how to invest during high inflation. Which leads to a key point: financial news does not usually err because journalists advance their own agendas. The problem stems instead from giving investors what they want. People watch train wrecks. They devour true crime stores. And they wish to read about investment dangers.
The problem with that mindset, of course, is that, as Yogi Berra once stated, it’s tough to make predictions, particularly about the future.
To cite another sage, Paul Samuelson famously quipped that “economists have predicted nine of the past five recessions.” He was too kind; a more accurate ratio would be 10 of the past three. Anticipating pitfalls before they arrive is an extremely valuable skill.
Unfortunately, as evidenced by the poor results of tactical asset allocation funds, the track record of those who have attempted that task is woeful.
What mostly remains, then, are discussions of events that have already happened: rising inflation, regional-bank woes, political battles.
Unfortunately, as we have seen, such research has limited value. It is not that those articles are consistently wrong. If so, they would be helpful, because investors could profit by betting against the grain. Rather, their outcomes are random. Sometimes, as with 2021′s features on inflation or this spring’s Silicon Valley Bank seizure, the signals occur early enough to be constructive. Other times, they do not.
The Counterargument
Writing this column has thus far depressed me. Who would doubt one’s own occupation? (The most believable Hollywood villains are those who regard themselves as heroes.)
Reflection, however, improves my mood. Rebutting this harsh critique of financial journalism is the undeniable fact that financial information has never been more available, courtesy of the internet, yet today’s investors act more sensibly than did their predecessors.
To be sure, some were tempted into speculation by the great bull market that followed 2020′s coronavirus slump. However, the excesses came from the visible minority, not the silent majority. Sum all the moneys placed into meme stocks, cryptocurrencies, and Robinhood Markets HOOD, and the result fails to match the amount of assets held by Vanguard’s equity-index funds. Most retail investors just chugged along, doing much the same through the upturn as they did during the selloff.
The same pattern held through 2022. After suffering net redemptions through the first half of the year, bond funds regained support in the second half.
For their part, net inflows into equity funds were positive for seven months out of 12, finishing the calendar year slightly in the black. And across the board, the purchases were sound, with investors continuing to favor low-cost, broadly diversified funds.
The Better Path
How to reconcile the ongoing demand for hot investment news with what has been relatively calm shareholder behaviour? To judge from the emails that I receive from my readers, who if atypically informed (they teach me much) perhaps possess typical attitudes, the answer is that most investors have become internet-savvy. They filter their results, reading much but acting sparingly.
While that may appear to be wasted effort, I would suggest instead that the habit is sneakily beneficial. Beginning investors are dangerously susceptible to narratives. They can easily be convinced, either by alluring tales that appeal to their greed or frightening ones that trigger their fears, that “this time is different”. Because the standard investment wisdom no longer applies, they are tempted into making portfolio changes. Such trades are unlikely to be successful.
Experience, however, tempers judgments.
Over time, investors learn not to expect financial certainty, that the current news cycle will soon be replaced by another, and that the prognostications of experts are to be consumed with many grains of salt, if not an outright spoonful. That process is hastened by education – in particular, by reading what people said and thought at a given time, and then later considering the correctness (or not) of those beliefs.
If that theory holds, my value comes as much from wrong as it does from being right. I hope that is the case, because the former is much easier to accomplish.
The views expressed here are the author’s
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