As investors we do better to look for counter-arguments than to succumb to anxiety and bearishnessby / October 11, 2017 / Leave a comment
Among the biggest challenges investors face are our own preconceptions—the particular tint of the spectacles through which we observe the world. We all tend towards confirmation bias, which leads us to seize upon evidence that supports our existing point of view to the exclusion of all else.
When things look worrying and uncertain, as they do in the UK today, I succumb all too easily to pessimism—the business environment is growing worse and markets are vulnerable to shocks. Successive news items confirm my fears and suppress my willingness to bear risks. At its extreme, this frame of mind can prompt people to sell perfectly sound investments and seek safety in cash.
At times like this it can be helpful to play a mental game designed to remind you that the data that prompts you to feel nervous are almost always open to competing interpretations. Look at the factors that are making you anxious and force yourself to view them from another angle.
Take the recent HMRC figures on Isa subscriptions for example. These showed that in 2016-17, the sum put into cash Isas tumbled by £20bn on the previous year to just under £40bn. A drop in saving that large, coupled with stats showing that consumer credit is still growing at almost 10 per cent a year, far above the rate of wage growth, makes it as plain as day that Britain’s squeezed lower and middle-income households are running down their reserves and piling up new debt just to stay afloat.
There is very likely to be a grain of truth in that view. But it’s also a gross simplification. People are feeling squeezed but that’s not the only reason they are abandoning cash Isas—even outside an Isa you can now earn up to £1,000 in savings income tax-free thanks to the new allowances. With interest rates this low, most people face zero risk of having to pay tax on their savings, so who needs a cash Isa? And with interest rates on personal loans extremely low as well, it is not unreasonable for people to want to borrow and perhaps not especially troubling either when so few are out of work.
Equally, Isa figures give only a fragmentary picture. What about saving into the new workplace pensions via automatic enrolment? Millions are now contributing to these retirement funds (and likely to face higher monthly contributions fairly soon), and may well leave them with less capacity for other sorts of saving and perhaps feeling that they have done all they reasonably can to put money aside. An apparent slide in one sort of saving might be offset by an increase elsewhere.
Don’t get me wrong. I have not turned from nervous to gung ho in the time it’s taken to read this far. The evidence from the stock market still suggests that companies reliant on the health of household spending are finding life tough: there have been a lot of profit warnings from restaurant groups this year, for example, and some people, at least, are clearly pulling their horns in. Most people who went abroad on holiday this summer will have come home feeling considerably poorer thanks to the pound’s weakness.
But there is always more than one way to view the data and as investors we do better to look for counter-arguments than to succumb to anxiety and bearishness. In the long-term, after all, markets tend to go up.