Markets are noisy

Markets are noisy

Photo by Jason Leung on Unsplash

In most industrial settings, health-and-safety rules demand that appropriate protective gear be worn, including the donning of ear defenders in high decibel environments.  Yet, when it comes to our investing health and safety, we have little in the way of regulatory guidance except the obligatory phrase ‘past performance is no guide to future performance’ to protect ourselves from the noise of market outcomes – particularly when investing without a financial plan and the guidance of a financial planner.  This can lead to an over emphasis on short term performance and the potential to make bad decisions based on our emotions.

Investing in markets is a very noisy business and some form of ‘ear defenders’ are required.  Given that markets do a pretty good job incorporating information into prices, they tend to move randomly on the release of new information.  Many investors are probably wondering today what returns will be like from equities in the final months of 2020 and perhaps next year too.  Basically, nobody knows (and don’t believe anyone who claims they do!).  The chart below illustrates the monthly returns every year, from January 1970 to August 2020.  As you can see, there is a lot of noise in the data.

Chart 1: Monthly returns of global developed market equities are very noisy

Data source: DFA Returns Web – MSCI World Index (net divs, GBP)

The only ear defenders we do have are behavioural.  We must keep our true investment horizons – 20 to 30 years or more, in many cases – at the forefront of our minds, accept that investing is a two steps forward, one step back process.  As we say to all our clients, don’t look at your investment portfolios too frequently and instead stick to your long term plan.

The chart below shows that even on a yearly basis, returns from equities are also noisy.  The blue dots show calendar year returns, and the red triangles show the annualised return for the decade.  Even the returns of decades are noisy.  Patience and fortitude are prerequisites for success.

Chart 2: Annual returns of global developed market equities are noisy too

Data source: DFA Returns Web – MSCI World Index (net divs, GBP)

Over this period, global developed equity markets have delivered a return of 10.9% on an annualised basis before inflation and 6.5% after inflation (but before costs).  Put another way, investors who stayed the course doubled their purchasing power every 12 years.  With those sorts of longer-term returns, try not to let the noise of the markets keep you awake.  Stick to your long term plan, make sure you’re investing in a mix of assets that’s based on your risk profile and don’t look at your investment portfolio more frequently than once a year.

Cheers

Charles

This blog is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.  Your capital is at risk when investing.  Past performance is not a reliable indicator of future results.