Nest Egg Investments

I’m over the US election.   I think many people are.  But I couldn’t escape my financial adviser obligation to post a final blog to wrap it all up.

President Trump (OK, President Elect Trump).  How many people on this side of the Pacific predicted that?  Well, I for one was shocked at the outcome.  To be fair, pretty much everyone I speak to and am in contact with was also surprised and shocked to some degree. 

The other thing that I have been highly surprised about has been the relatively turmoil-free reaction of most of the world’s financial markets, post election.  To a large extent, equity markets have moved on from election day and traded within what I would describe as “normal” ranges eg. US, Australia markets up ~1%, NZ market down ~2%.  I was certainly expecting much greater volatility, especially in the short term, and I was not alone.

The turmoil may still come(!), but right now this is yet another reminder that it is very difficult to forecast how markets will react to any given event, and so in my view it’s best not to try.  As I’ve noted previously, timing the market is very hard to do successfully.

So why did markets react as they did?  Well, with the benefit of hindsight, markets took a fairly pragmatic view of a Trump presidency (as opposed to many predictions of a hysterical reaction).  On the economic front, there are as many positives as negatives.  Policies of lower corporate taxes and boosting infrastructure spending are seen as positive – for the US economy in particular.  There are negatives too – greater US protectionism may lead to higher prices in the medium term, and with it increased inflation and higher interest rates.  And anti-free trade policies could curb global growth and hurt trading nations like NZ. 

But perhaps the biggest factor in the markets not tanking on a Trump victory was the conciliatory tone he struck on election night and afterwards.  He didn’t gloat, talked of the importance of coming together, and was fulsome in his praise for both Hillary Clinton and Barack Obama.  This came as a stark contrast to his rhetoric during the election campaign, and sent a signal that a Trump presidency may be less divisive and more pragmatic than many feared.  It was a relief for markets.

We may never see another US Election quite like this one, and it will be fascinating to see how the Trump presidency plays out over the coming months and years.  But I have reached saturation point with the US election.   I’m pleased the sun is still rising each morning, and I’m pleased it’s over. J

Dean Edwards

The US election is looming and uncertainty and volatility are the overriding sentiments impacting financial markets in the final days pre-election.

At the time of writing the NZ sharemarket has fallen over 11% from its all-time high on September 7.  This correction is not entirely unexpected after a very strong run, with increasing global interest rates making high yielding NZ equities now look a little less attractive.  However, even with this decline, the NZ sharemarket (as measured by the NZSE 50 Index) is still up 6% for the calendar year, and over 10% for the last 12 months.

Global equity markets have also retreated over recent weeks – the US and Australian markets are down 5% and 7% respectively from their peaks earlier in the year.  A common factor is jitters over the implications of a possible Trump victory in next week’s US election.  While still unlikely, a Trump victory – with his anti-free trade views and combustible personality – is likely to throw markets into further turmoil, at least in the short term.  On the other hand, the more likely Clinton victory would probably be favourably received by markets.

These recent developments highlight a couple of things. 

Firstly, equity markets are highly volatile!  They react, and often over-react, to current events, news items, investor emotions, and supply and demand.  Equity markets often go down (despite a great run over the last 6-7 years), but invariably bounce back.  The long-term trend is positive as the economy and corporate earnings grow over time.

Secondly it’s very difficult, and usually counter-productive, to try to “time” the market.  As an investor you may hold a view that a market is under or over-valued, but trying to accurately predict when the market will turn is nigh on impossible and will often lead to an investor buying or selling too late or too soon, and also missing out on big gains during periods when s/he is out of the market.

Back to Clinton v Trump … with the circus that is the US election finally drawing to a close, what is likely to happen to financial markets? 

There is considerable speculation on this subject amongst commentators.  Mostly the views support a Clinton victory being positive for markets, with Clinton seen as a capable and experienced (albeit not likeable) president-in-waiting, and largely representing a continuation of the Obama regime.  A Clinton victory is generally considered to be priced-in to the market, albeit discounted somewhat for a Trump upset. 

On the other hand, a Trump win (considered unlikely) could cause chaos.  Markets dislike uncertainty, and Trump’s inconsistent policy positions seem likely to lead to further short term market uncertainty, if elected.   Some commentators have gone so far as to predict a global recession and stock market collapses in the event of a Trump victory.  This may or may not come to pass (my view is less pessimistic), but at the least we should expect considerable market volatility if Trump is elected.

My advice is to stay invested, sit back and enjoy (if you can!) the ups and downs that are likely over coming weeks.  Be prepared to hang in there for the long term.  Even if markets fall, they will come right – they always do. 

Dean Edwards

In a Swedish self-survey of driving skill, a staggering 90% of respondents rated themselves as “above average” drivers!  This slightly amusing result is an example of overconfidence – dangerous when you are behind the wheel, but also potentially damaging to your finances if it flows through to assessing your skill as an investor.

In fact, one of the reasons that investing successfully can be difficult is that the human brain is hard-wired with a number of psychological biases that often push us into making poor decisions.  Below are some of the more common biases.  How many do you recognise in your own behaviour?

Overconfidence

As per the Swedish driving example above!

Confirmation Bias

Selectively seeking out information that supports your views (and ignoring everything else).

Home Bias

Favouring investments in your home market, because they are more familiar to you.  Also related to Attention Bias.

Attention Bias

Favouring products, companies and investments that are in the news, more than those that are not.

Long Shot Bias

The gambler’s instinct to favour the “next big thing” investment with potentially big returns, even if the likelihood of the long shot delivering is very low.

Anchoring

In an investment sense, making decisions not based on future prospects, but on the price paid for an investment.  Also related to Loss Aversion.

Loss Aversion

An interesting phenomenon where investors fear losses considerably more than they enjoy equivalent (or even greater) gains.

These tendencies can at times lead to poor decisions when it comes to asset allocation, the selection of investments, and the timing of buy/sell decisions.  Recognition of which biases affect you the most, and being able to step back to make decisions rationally are the best counter measures.  And of course, engaging a good financial adviser should go a long way towards helping you avoid investment errors caused by psychological biases 🙂

Thanks for reading.

Dean Edwards