Why smart investing in retirement should be like watching paint dry

Paul Samuelson, the late Nobel Prize-winning American economist, once said that “investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas”. In other words, don’t look to the financial markets for your entertainment – that’s what Netflix is for!

Yet we are bombarded daily with dramatic financial headlines, dripping with emotive language, daring us to act – to do something in response to the unfolding crisis of the day. Fear sells, and the examples are everywhere.

On Christmas Eve in 2018, as many settled in for the festive season, the US share market fell heavily in response to concerns about the Federal Reserve Bank’s next interest rate move, and the ongoing trade tension between China and the US. Sound familiar?

The MarketWatch.com headline of the day grimly pronounced: ‘The stock market just booked its ugliest Christmas Eve plunge – ever’. There was no Santa Claus rally in 2018.

Fast forward to Boxing Day – a mere two days later – and those same share prices bounced like never before. In stark contrast to the depressing Christmas Eve headline, the good folk at MarketWatch described the dramatic turnaround by exclaiming: ‘Dow up more than 1,000 points in biggest one-day gain ever’.

What changed? In the real world, not a whole lot. Analysts and commentators couldn’t convincingly explain what drove the reversal and those that tried were mostly guessing. It is worth remembering that through no fault of their own, many who are paid to predict the future or rationalise inexplicable short-term events, are often wrong, but never in doubt.

Keep calm and carry on investing

Against this backdrop, one of the biggest retirement planning challenges is staying focused on your long-term strategy in a world that is obsessed with the here and now. You are encouraged to plan with a 20- or 30-year retirement in mind and to invest for decades, yet news outlets breathlessly report the apparent significance of hourly movements of currencies and share prices – imploring you to take action, when more often than not, that is the last thing you should do.

Provided you have a sufficiently diversified portfolio and a well-considered plan in place, for most investors, constantly reacting to short-term events is the exact opposite of what works. Warren Buffett was renowned for saying: “Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell”.

And that temptation is everywhere. Earlier this month, we saw the short-term madness of markets reach fever pitch as news of the Wuhan coronavirus emerged.

According to LexisNexis data, during January 2020 there were more than 41,000 English-language print news articles referring to the coronavirus, and when combined with the volume of social media content dedicated to the outbreak (accurate and otherwise), the intensity of the coverage was unprecedented.

How did financial markets respond to this media frenzy? Sentiment lurched from greed to fear and back again. In the space of just one week, the Morningstar Research daily overseas market report gave us the following headlines:

• Jan 28, 2020 – ‘Wall Street tumbles as virus fuels economic worry’
• Jan 31, 2020 – ‘Wall St reverses course to end higher after WHO comments’
• Feb 3, 2020 – ‘Wall St tumbles on virus, growth worries’
• Feb 4, 2020 – ‘Wall Street rebounds from virus fears, helped by factory strength and tech stocks’.

This is not to diminish the potential seriousness or scale of the coronavirus outbreak, but to highlight the disconnect that often occurs between the fear factor peddled by media outlets, and actual financial outcomes over time. For example, despite countless other scary headlines over the past 12 months relating to US-China trade wars, US-Iran military tensions, catastrophic bushfires, widespread retail store failures and Brexit, global markets have risen strongly due mostly to the reality of record low interest rates.

At the 2016 Portfolio Construction Forum Conference in Sydney, Philippe Jordan, president of global asset management company Capital Fund Management, described these periodic events that cause short-term financial market panic as ‘mini-crises’. Jordan pointed to research by the OECD indicating there have been around 400 of these mini-crises for financial markets to navigate over the last 55 years. On average, that’s one mini-crisis every eight weeks!

“We know just by looking at the past that crisis is the de facto operating code of markets and societies in general…,” Jordan said in an August 2016 interview with Investor Daily. “But there are hundreds of pseudo-crises that you’re supposed to do something about, and doing something about them is precisely the wrong thing to do.”

Smart investing in retirement

Over the long-term, investors tend to do well in retirement where they break the psychological connection between the negative event (the mini-crisis), and the innate need we have as human beings to instantly react.

For most, it is a statistical improbability that you will be able to successfully get in and out of the market at precisely the right time. Successfully timing the market is extremely difficult – selling may be easy, but deciding when to buy back in is fraught and being caught on the sidelines can cost dearly.

Research conducted by Russell Investments in 2018 found that between 1995 and 2018, an investor in the Australian sharemarket who tried to time the market and missed the 10 best market return days would have achieved a return that was one-third lower than the investor who simply stuck to the strategy and remained invested throughout the 23-year period.

But, of course, it is risky to invest in a single asset class (such as shares) to the exclusion of all others.

Diversification simply means we spread our investments across a range of different assets that are likely to offer different return characteristics over time. In doing so, we can generally expect to reduce risk and achieve more consistent return outcomes, compared to holding a more limited number of investments.

Over time, the vast majority of the return outcome you then achieve is a direct result of this process of ‘asset allocation’ – or the proportion of your money held in growth assets (such as shares, property, and infrastructure), relative to defensive assets (such as bonds, term deposits and cash).

If you adopt a long-term mindset that acknowledges there will always be noise, but consciously recognise and look past the distractions, you’ll maximise your chances of success on your financial journey.

Put a plan in place. Stick to it. Turn down the noise.