September 27, 2020
In times of market uncertainty investors find themselves wondering where the markets will go and whether they should do something about it. Often investors will try to predict market directions in order to enhance their returns trying to follow the old “buy low, sell high” rule for investing. Rearview investing is when investors looking to “buy low and sell high” end up doing the investment equivalent of driving a car by looking at the rearview mirror.
Let’s have a look at how this phenomenon manifests itself. When an investor looks back at what markets have done, they can begin to believe they had the foresight to predict these moves accurately. They then begin to believe they should be able to accurately predict the next major market move(s). Using the latest major market tops and bottoms related to COVID-19, rearview investing would take the form of an investor thinking that he saw the pandemic and subsequent market crash coming and that it was quite obvious the markets would rebound swiftly after falling more than 30% based on all the information available.
Although it may seem completely logical to think this way, there are a few flaws in this line of thinking. Let’s start with the obvious: no one really knows exactly what will happen or when it will happen. There can be signs, warnings, triggers or data that investors use to make predictions however it’s never guaranteed that markets will go the way the evidence suggests. Plus, if most investors knew what was going to happen and when, there would only be winners and no losers. Markets need people on both sides of a trade in order to work.
Next, let’s not forget that hindsight is always 20/20. Almost every investor in the world has access to the exact same data readily available to them. Of course, now that we’ve seen it play out, it seems obvious that the pandemic would devastate the entire world, markets would crash, governments would come to the rescue, lockdowns would help flatten the curve and that stock markets would rebound immediately. Anyone could have predicted that, right? Wrong! In fact, in the depths of the market lows in March many investors were worried that things could get much worse before they got better. These same investors, now armed with their 20/20 hindsight, are upset for not putting more money in the markets in the March lows. Just because we now know how it played out doesn’t mean we knew what the outcome would be at that time or that we know how it will play out next time. Hindsight is 20/20, the future is not.
Certainly, there’s nothing wrong with learning from your mistakes or even shifting your investment allocation slightly from time to time. But making exaggerated bets on market direction based on what you think you could have predicted is usually not a sustainable strategy for long term investment success. Bottom line is that the negative consequence of being wrong far outweighs the positive outcome of being right. Avoiding crippling mistakes when you can’t afford to make them is crucial to an investor’s long-term success.
This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.
Author:
Marcel LeBlanc, CFP®, CIM® is a Financial Planner with Louisbourg Investments. Comments or questions may be submitted to Marcel at marcel.leblanc@louisbourg.net, or he may be reached at (506) 383-5204.