This month we were delighted to be asked back again to write a piece for The Sunday Times. This time we talked about the rather interesting manoeuvres the stock market has been making, and why it’s best to just leave predictions well alone.
In case you missed it, here it is, unabridged, in all its Sunday morning breakfast-accompanying glory.
In third-quarter stock markets that represented a second consecutive quarter of remarkable overall gains, what stock outshone all the others in the S&P 1500 Composite Index?
Zoom? Apple? Netflix? Nope, none of these, or any of the other trendy FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google’s parent company Alphabet). Not Tesla, either.
It was Tupperware, up a jaw-dropping 345% for the quarter.
“Of course,” you might reason. “Everyone’s cooking at home this year. That makes sense.”
But consider this: Tupperware’s remarkable quarter ramped up most dramatically in late August, after steep, double-digit declines in each of the three previous quarters. So, while you are enjoying bulk freezing in your Tupperware pots (even I have these now!), please remember this about your investment portfolio: Trying to load up on the market’s next big hit based on recent returns is more likely to detract from than contribute to achieving your personal financial goals.
Prices change when the unexpected happens
That’s because future returns don’t hinge on what has just happened, or even on what is expected to happen next. Rather, as Dimensional Fund Advisors explain, prices change when the unexpected occurs:
“For most investments and most investment horizons—a month, a year, five years, even ten years—the realised return is driven far more by the unexpected return than the expected return.”
This applies to surprises like Tupperware, as well as to the supposedly unstoppable and never ending FAANG share price surges.
In fact, the more popular a big growth-oriented company becomes, the harder it often is for it to keep exceeding everyone’s sky-high expectations. To continue outperforming its popular benchmark, it must continue to deliver bigger, better, ever more pleasant surprises. Eventually a new competitor steps into the ring and does things totally differently. Then the cycle begins anew. I’m sure we can all think of a few household names where this happened. Nokia anyone?
Here’s another way of thinking about it: have you ever noticed how James Bond rarely needs to defend against more than one or two challengers at a time? Even when Bond is way outnumbered, the individual attacks arrive in implausibly orderly fashion. Otherwise, James wouldn’t be starring in another movie soon (I’m so disappointed the latest Bond movie has been postponed until 2021 – damn you coronavirus!).
Stock market pundits (often called active fund managers) suggest markets are subject to an equally implausible universe, where there’s always an orderly set of reasons for why “X” is about to soar, or “Y” is about to fall. In real-life markets, that’s just not how it works. Everything happens all at once, all the time.
Invest in the whole of the market
Overall, this is how stock markets grow (and therefore your pension and investment portfolios), even as the individual players come and go. The market as a whole will continue to move forward over time, individual companies may not. The lesson for investors is to invest in the whole of the market. A great example of how this might work is the Dimensional Fund Advisors World Allocation funds. These funds have over 12,000 individual holdings across the globe. Now that’s real diversification.
The answers to these questions will no doubt have an effect on stock markets in the short term:
But even if we knew the answers, we still couldn’t predict what would happen to the stock markets. Anyway, short-term market movements are largely irrelevant to long-term investors. Furthermore, short-term declines are always temporary and it’s never “different this time”.
Don’t even try to predict the markets, tempting as it is
In short, investors (or stock market pundits) don’t stand a chance at guessing when and from where the market’s next helping hand or painful punch is going arrive. This is why we continue to recommend positioning your portfolio to harness the power of markets’ broad expected outcomes, rather than their never-ending torrent of erratic incidents. So, tune out the noise and keep reminding yourself that the best strategy is to #StickWithThePlan.
What should we conclude from all of this? We can’t predict the future (nobody can) but we do know some important things:
Making better decisions
If you’ve enjoyed reading this article, you might be interested in our in-depth look at behavioural biases and how they can affect our financial decisions. You can download Making Better Decisions: Know Your Behavioural Biases in full today.
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.