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RP: One of the main reasons why people make bad investment decisions is that they lose sight of what they’re investing for.
For most of us, the ultimate goal is to ensure that we have enough money to support us in retirement and that we don’t run out before we die.
In fact, previous generations were rather better at saving and investing for the long-term than we are.
Janette Rutterford is Professor of Finance at the Open University Business School.
JR: In the old days, people used to have no pension so they saved for their pensions. And you see what happened, if you look at their portfolios: as they had more money, they added shares to their portfolio, and then as they retired and had to live off it, they would start selling down. But they had no intention of selling in the short-term, because they needed that money for the long-term. The problem we’ve got now is that a lot of people are using shares as a speculative asset because they’ve got pensions, they’ve got the security of a salary which you didn’t necessarily have in the old days. So they’re treating shares as a speculation short-term. Fair enough, there’s nothing wrong with that. It’s just you’re not going to get the steady returns you’re going to get if you invest for there long-term.
RP: One advantage our ancestors had is that they weren’t constantly distracted as we are by the 24-hour news media.
When markets are falling and you’re reading about it in the newspapers and you’re seeing people talk about it on television, it can be very tempting to do something. Usually though, the best course of action is to sit tight.
JR: We all have behavioural biases, that’s the problem. We like to see order out of chaos. We also don’t like to admit that we’re wrong, so our losses. We’re reluctant to sell our losses, because we think they’re going to go back up. They’re not necessarily going to go back up. We sell things that have gone up, when maybe we should hold on to them. So all these things are biases in our behaviour which come from generations back of behaviour and there’s not much we can do about it. But the best thing to do is to just keep your portfolio long-term and, on the whole, you will do reasonably well.
RP: A useful exercise for investors who are tempted to try to time the market is to look back through market history.
Patient, diversified investors have almost always been rewarded.
JR: If you look at shares and bonds and cash over 15 or 20 years. It hardly ever happens that shares don’t do best out of that because, over the long-term, shares will give you a higher return because you’re taking more risk in the short-term volatility sense. The share price can go up and down. If you have to sell on the day, you might not make as much money as you expected. But in the long run, you will do very well with shares because, on the whole, they earn a higher return. So if you’re looking at 15 or 20 years – or even for your pension, it could be 40 or 50 years – then shares should be a part of your portfolio.
RP: So, we should try to learn from our ancestors and focus on the long-term prize. Patience and discipline are hugely important qualities for investors to have.
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