‘7-point plan’ for staying patient: Understand the ‘lay of the board’

The coping strategy fit for the times, our 7-point plan for staying patient, draws in part on some useful research in behavioural economics. Step 1: Understand the ‘lay of the board’, aka the key drivers of market movements. And when doing so, take your time. Remember it is human nature for people, even those very experienced in their fields, to act impulsively, especially when bombarded by compelling stories on the news. Scientists say snap buying and selling decisions get made by the fast-thinking parts of the brain that rely on metaphors and loose associations, instead of facts, explicit beliefs or well-reasoned choices. We advocate against snap decisions. But we recognise volatility, if appropriately managed, will inevitably lead to opportunities to be captured in the longer run.

Distinguishing noise from substance is a deliberate and slow process that takes place in parts of the brain that are strategic, but lazy. That is why not many of us are chess players. Having a reliable investment partner during volatile times is crucial. At Russell Investments, we see the key pieces on the financial chess board as 1) mediocre global growth; 2) negative real cash yields; 3) low inflation; 4) expensive valuations in many equity and bond markets; 5) commodity oversupply and 6) political risks. These factors create the challenging investment environment we live in. The multi-year ‘bull run’ for shares and other risk assets is finished, and we suggest diversifying away from pure equity risk. Risk management, or downside limitation, should become an explicit part of any good investment strategy. Market noise and news headlines should be taken with a degree of scepticism.

Back in the world of behavioural economics, experiments suggest our analytical and sceptical brains can be activated by frowning. It seems doing as little as putting on a frown can help us be more vigilant and analytical especially when processing compelling stories. So, remember Step 1 of the ‘7-point plan’ for staying patient, and indulge in the news coverage, slowly, and with a frown.

This article forms part of the 7-point plan for staying patient series.

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