At large: Ross Greenwood

The set-and-forget-forever investing strategy is bound to end in tears

‘When does a bust in the market normally happen?” I quietly asked a group of mates a week or so ago. The chorus came back: “After a boom.”

So if this is so commonly understood, why are we all so shocked when a market bust arrives? And if we also know the conditions of a boom (buyers dictate price, not sellers) then why are so many of us so poor at taking action during these periods?

Think Melbourne and Sydney property, global government bonds, Bitcoin or today’s stockmarket. Each of them boomed, giving plenty of signals for people to sell. Some did, no doubt, but plenty stayed the course to their ultimate misfortune.

There can be many reasons: my money is tied up, I don’t have the time, I’m worried that prices might go even higher, I will have to pay tax on my profits, or I don’t know where else to put my money.

But the most important decision is to make a decision ... and then to put it into action. Over time I have discovered myself to be a lazy investor who uses all of these excuses as reasons not to act. Almost invariably when I do react it is mostly for the best (not always, but more often than when I leave bad decisions to rot even further).

The worst investors are what I would call the true believers – zealots even. These are people who pragmatically stick with a belief that a product, technology, company or investment trend is 100% right and any detractors are 100% wrong. They will stick with their view to the bitter end.

The problem with this type of investor is that they will eke out the very heights of any boom. Their wealth could soar and their confidence in their idea will seem impervious (think Bitcoin investors until the beginning of this year). The problem with such confidence is always timing. There are plenty of cases before the bankruptcy courts of inventors who thought their idea would change the world, who went broke, and someone else picked up and exploited their idea profitably.

And right now no investor could help b ut recognise there has been a boom in the US that has flowed over to the rest of the world, including Australia. So if, as we have already established, that a boom is followed by a bust ... then the only thing we have to agree on is the timing. But that’s always the most difficult bit, if you are to make money or prevent loss.

My thoughts on the timing have always been around the mid-term US elections. My reasoning is the fact that Donald Trump’s first term has seen significant tax cuts and policies designed to boost US business. Trade and tariff threats are already causing market nerves, with unknown outcomes contributing to the worry. The bigger problem, as I see it, is that Trump has already thrown plenty of stimulus at business.

So what happens if/when the candy runs out? In advance, you imagine, investors will get nervous and markets will turn down – initially quickly. Think Sydney and Melbourne housing markets, think Bitcoin, think government bonds.

Too many investors – conscious of earning better than the 2% on offer in cash management accounts – have deliberately put themselves at the risk of capital loss. The problem is that if held too long, this strategy must carry an increased risk of loss.

And this is why the set-and-forgetforever strategy is never the way for a sharemarket investor to behave and manage their assets.

The worst investors are those I would call the true believers – zealots even