Sometimes the macroeconomic outlook changes like the weather, and investors find themselves sailing in a crosswind of uncertainty.
The Reserve Bank of Australia (RBA) is ensnared in a catch-22 dilemma: whether to raise rates to tame inflation and risk plunging the economy into recession, maintaining the current status with the hope that inflation will abate and the economy will grow; or yield to calls for cuts due to cost of living crisis. The delicate balance between addressing inflationary pressures and safeguarding against economic downturns underscores the RBA's reluctance to adjust interest rates, especially given the alarming rate of growing national household debt. In the broader global context, despite speculation surrounding the US Federal Reserve's potential influence by election cycles, historical data reveal a consistent pattern. Since 1980, the Fed has both hiked and cut rates in every election year except 2012, when rates remained at zero amid post-financial crisis recovery. Economist Paul Samuelson is famously quoted as saying that the stock market has predicted nine out of the last five recessions. While somewhat satirical, this quip demonstrates how poor investors and economists are at predicting the timing, depth, and duration of recessions.
The world of investing can be a complex and ever-changing landscape, and the financial media can make it even more confusing, having you believe that the macroeconomic news of the day is the most important factor in any of your investing decisions. Yet the overwhelming majority of the world’s greatest investors disagree.
There is an old saying on Wall Street that “financial markets are driven by just two powerful emotions: Greed and Fear.” Investors often let their emotions dictate their decisions on when to buy, hold and sell investments, with fundamental value a distinct second consideration. This is rarely a recipe for success, and largely explains why investors vastly underperform even the indices they track. For example, over the two decades ending in 2020 the S&P 500 advanced 7.5% per year, yet the average investor gained only 2.9% per year as they zigged and zagged at precisely the wrong times. Being aware of behavioural biases and creating strategies to deal with these can dramatically improve an investor’s performance.
The world we live in today moves at lightning speed. Information is available to us at our fingertips, and news travels faster than ever before. In the realm of finance and investing, this can lead to investors panicking and making fear-driven decisions that often cause judgement errors.
Not everyone is cut out for contrarian investing.
Typically, purchasing shares in an index hugging ETF is a simpler option than formulating a distinctive investing strategy that capitalises by going against popular sentiment. |
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.
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