Recently I was asked by a fellow member at my golf club what the next 10 years might hold in store for an investor with a 10 year investing horizon. While the round of golf progressed we discussed this big picture question and his quizzing helped me express a view that I probably wouldn’t have come up without his questioning.
It’s a question that I am often asked but seldom answer directly as I know, that if pushed to select a single trait that described financial markets, it would be massive uncertainty.
Furthermore, the question of market direction can always be analysed in a multiple of timeframes from ultra-short term to long term but his question was specifically 10 years out. This led me to thinking that his question would comprise a huge demographic of investors, maybe every investor!
The specificity of looking 10 years out greatly simplifies analysis because the fear of the risks associated with short term market volatility clouds our vision and unnerves investors into inaction.
Forming a view for the longer term horizon
I asked him if he or anybody that he follows provides analysis input into his decision making.
It turns out that the majority of “noise” that he gets from newsletters and other sources is short term focussed – just a few days to a few weeks out. Besides my own view violently agreeing with this, I confirmed this opinion with a number of investing friends and other industry commentators.
He also said that the longer term views that he gets, which is in the minority of the “noise” that he has access to, have led him to believe that the investing world as he knows it “may be coming to an end” within his investing horizon!
Being a technical analyst, I consider the current technical patterns of the main equity markets and inter-related markets and then attempt to put these into historical context in an attempt to determine a potential future direction. I accept that there are many other ways to do this, one of which is geo-economically and another is fundamentally, both of which I have used on Sky Business and in previous blogs a number of times over recent months.
Conclusion that we came to
When looking at such a big picture, clarity reigned in my mind. I was able to put into perspective to my fellow golfing member what the 80+ year monthly charts of the DJIA and S&P500 looked like compared to price moves over the past 10 – 13 years and what the main current geo-economic drivers were for global equity markets.
I was able to do this because I have been conducting this analysis through 2013 watching every week’s equity index movements and comparing them to similar situations in the past. In a blog in February, “History Making Event on the Horizon”, I discussed the potential for an event occurring in the weeks following that blog. Then in October after this history making event had occurred I discussed that The history making event happened! Now what?
When looking at such big picture analysis relative to the past, the only view that an investor can form in the long term, no matter which analysis approach is used, is that there is an extremely high probability that asset prices will rise over the next 10 years, that is inflation.
I explained to my fellow golfing member that even without conducting any analysis, adopting a cautiously optimistic outlook sets up an investor for potential success whereas an investor with a pessimistic outlook that can only perceive downside, which blinds them to the possibilities of any investing profits, let alone wild profitability.
The conclusion is investors CANNOT DO NOTHING. In my view, being in cash and/or the only ‘investment’ being the family home are both considered doing nothing. Doing nothing is the spectators approach, frozen into inaction by fear, or risk, of losing. As Charles Ellis stated in his book “Winning the Loser’s Game”: “..the real risks in the long run are the risks of inflation and excessive caution.”
Maybe I’m being too one-eyed with the inflation outcome as there is a scenario under which lower asset prices could eventuate, that of deflation. If deflation is the outcome then we all go down together and cash will undoubtedly be the king of investment strategies. However, if you do the research you will find quite emphatically that there is a very low probability of deflation occurring, mainly because governments will do all that they can to avoid the deflation scenario.
The only conclusion is that investors just have to plan for asset prices rising and then determine what strategies to deploy to take advantage of this whilst also protecting their capital.
Should shares be a dominant part of an investment strategy over the next 10 years and, if so, as my fellow golfing member asked, “how do I overcome the risk of losing a big chunk of my capital in a possible repeat of a 1987 type crash or a 2008 type global financial crisis?”
Part 2 of this blog, published later this week, will answer these questions.
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