Do investors have their Black Friday moment?
THIS week’s timely finance fact is that the origins of the term Black Friday are, fittingly, rooted in the world of financial markets. On Friday September 24 1869, on the New York Stock Exchange, a failed attempt to corner the gold market caused panic in the market and a subsequent collapse in the price of gold.
The term later became popular in the United States as the day after the national Thanksgiving holiday, when stores would open early and offer large discounts on all types of goods such as furniture, clothing and even package holidays.
Roughly a decade ago, we started to get in on the act, thanks mainly to the influence of two American retail heavyweights: Walmart (which owns Asda) and online retail giant, Amazon.
Now, it is common for local shoppers to delay splashing out on their next TV, games console or sofa until the Black Friday sales bonanza, in the expectation that there will be some excellent bargains to be had.
One might wonder if it is right to adopt a Black Friday mentality with investments. Should we willingly forego investing now, in the expectation that conditions will be more favourable at a certain point in the future as we try to ‘time the market’?
Looking at the current economic landscape, one may be forgiven for having a less than optimistic outlook: is it too late to get involved in markets which have travelled such a long way in a relatively short space of time? Can one get invested when the road ahead looks so difficult? What is the potential for higher interest rates?
Readers should be aware of the following key points when considering if there is ever a perfect time to start their investment journey.
Firstly, we have a natural tendency to recall the recent past more easily than anything further back in time, which in turn seeps into our expectations for the future. This so-called ‘recency bias’ is perhaps particularly acute at the moment, given the economic debris in our rear-view mirror. Good decisions about one’s longer-term financial future ought to take in a wider and more balanced view of the past than such a bias would lead us towards. Bigger picture, right?
Another human tendency we have is our attraction to bad news. As investors, we need to ensure we aim for a more balanced view. In reality, the picture is always more complex – usually offering cause for both optimism and concern, as well as a healthy dose of logic. It’s not all about the drama.
It is also important to note that our emotions make it extremely difficult to time an investment. There will always be uncertainty and risks on the horizon. A logical awareness of this risk gives rise to doubt, leading us to conclude that there may never be a perfect time to invest. Interestingly, it is precisely this uncertainty which means investors can be compensated with higher potential returns than cash.
Finally, we can often convince ourselves that by reacting quickly to news or events, we may get ahead of the curve and get in at a good price. Unfortunately, the part-time investor is at a significant disadvantage here through the lens of the Efficient Market Hypothesis (EMH). Simply put, EMH means all we can know, fear, and hope from our current vantage point is already incorporated into prices.
Part-time investors must ask themselves whether they can genuinely know something about some aspect of the future that isn’t already priced in - something that nobody is talking about. This is a task which investment professionals earn their living trying to accomplish on a daily basis, so I imagine this doesn’t apply to most readers either.
The simplest way to think about all this is to focus on your long-term investment goals. The driving force of long-range returns remains founded on the world’s ability to invent new stuff and get better at using it. Given that the future sources of innovation and productivity remain difficult to predict in terms of time, place, and magnitude, the only logical approach is having a diversified investment portfolio, today.
The truth is that hunting for bargains within the investment landscape is a complex and full-time job, so for the real discounts this Black Friday, let’s agree to stick to the big electrical deals and I’ll make mine a 60-inch plasma screen.
:: Mark Rooney is a wealth manager with Barclays Wealth and Investment Management team in Belfast.