What can we learn from previous generations about investing?

What we can learn from previous generations about investing

Previous generations were, in many ways, better at saving and investing for the long term than we are today, and there is a great deal modern investors can learn from them. One of the main reasons people make poor investment decisions is that they lose sight of what they are actually investing for. For most of us, the ultimate goal is straightforward: to have enough money to support us in retirement, and not to run out before we die.

In this video, Janette Rutterford, Professor of Finance at the Open University Business School, explains what our ancestors understood about long-term investing. In the days before pensions, people saved diligently for their own retirement, building up shares over their working lives and only selling down gradually once they retired. Crucially, they had no intention of selling in the short term, because they knew they needed that money for the decades ahead. Today, with the security of salaries and pensions, many people treat shares as a short-term speculative asset instead, and in doing so forfeit the steadier returns that come from investing patiently for the long term.

You'll also learn why our ancestors had one distinct advantage: they weren't constantly distracted by 24-hour news media. When markets fall and the headlines and pundits urge action, the temptation to do something is powerful, yet the best course is usually to sit tight. Professor Rutterford explains the behavioural biases that trip us up, from our reluctance to sell losing investments to our habit of selling winners too soon, and why keeping a long-term perspective is the most reliable antidote.

The takeaway: look back through market history and the lesson is consistent. Patient, diversified investors have almost always been rewarded. Over 15, 20 or even 40 to 50 years for a pension, shares have reliably delivered higher returns for those willing to accept short-term volatility. So learn from previous generations, focus on the long-term prize, and treat patience and discipline as the essential qualities they are.

Chapters / Key points

• Why losing sight of your goal leads to poor investment decisions
• What retirement really means for how you should invest
• How previous generations saved and invested for the long term
• Why treating shares as short-term speculation costs you steadier returns
• The advantage of not being distracted by 24-hour news media
• The behavioural biases that trip investors up
• Why selling losers reluctantly and winners too soon hurts returns
• What market history shows about patient, diversified investing
• Why shares belong in a long-term or pension portfolio

Transcript

What we can learn from previous generations about investing

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 the 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.