- A new year represents a great moment to reflect on investments
- ...but don’t let those reflections anchor you to the past
- Plus loads of ideas generating data
The reflective state of mind many investors find themselves in as a new year dawns embodies some interesting contradictions. On the one hand, there’s a great opportunity. A new year marks a clean slate: performance from the previous calendar year is totted up and put aside; successes and mistakes can be reflected on; and resolutions are made about how to approach the coming 12 months. It’s often a very welcome fresh start, with investors energised by the holiday break.
However, to a noteworthy extent, New Year plans are more about the prior year than the year ahead. Indeed, such plans necessarily feed off the consensus views formed during the previous year. And the temptation is always to pay too much attention to the rear view mirror. Behavioural psychologists have found we all have an excessive fondness for contemplating the reassuring clarity offered by the past over tackling the fracturing possibilities presented by the future.
All this can be an issue because of the significance we often attach to our New Year reflections. When it comes to investing, there is no neat beginning and end, just lots of change, all of which has varying degrees of significance.
But the state of mind we’re in on 1st January can have an unhealthy sway over our approach to the rest of the year given the focus it gets. Our New Year reflections can be a powerful mental anchor. Psychologists have found “anchoring” has a major influence on investor behaviour that can seriously harm the quality of decision making.
For example, where should an investor stand on the question of whether last year’s trends will persist or reverse? The reality is that the best place is oscillating between the two possibilities; an uncomfortable, everchanging and seemingly contradictory position.
Indeed, over the last ten years, an investor that on 1 January backed the ten best performing FTSE All Share sectors of the previous year would have outperformed the market handsomely with a 167 total return compared with 72 per cent from the index. But an investor who only backed the ten worst performing sectors of the previous year would also have comfortably outperformed with a total return of 104 per cent. For both, it would have been a bumpy ride.
Some investors have the time and discipline to change their portfolios to reflect the probabilities they assign to any given scenario as facts change. However, for many, the best approach is to sensibly structure a portfolio to reflect the fact that markets are unpredictable and it often pays to have feet in what may appear contradictory camps.
Whatever course readers take, much of the data in the Ideas Farm should help offer insights to the market’s ever changing mood, such as our style chart, which over recent months has seen a big swing from favouring momentum and growth to value. In the coming 12 months we’re likely to see plenty of change and plenty of fresh stock ideas thrown up by these pages.
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