At large: Ross Green­wood

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

Money Magazine Australia - - CONTENTS - Ross Green­wood is Chan­nel 9’s fi­nance ed­i­tor and Ra­dio 2GB’s Money News host.

‘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

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