Money and Happiness |  The difference between La Ronde and our investments

Money and Happiness | The difference between La Ronde and our investments

in the newsletter money and happiness, emailed Tuesday, our journalist Nicolas Bérubé offers insights on getting rich, investor psychology, financial decision-making. His texts are reproduced here on Sundays.

Posted yesterday at 7:00 am

Nicholas Berube

Nicholas Berube

I went to La Ronde recently with my family. It had been over 20 years since I had been there, and we had a great time, almost no wait for the rides, thanks fall.

During the boarding of the most imposing rides, I could notice how the employees worked to ensure the safety of the passengers.

Before starting the carousel, the person behind the controls must see their assistants arranged in various places in the starting area pumping their fists in the air. If there are four attendees, the operator must count four raised fists. If he doesn’t see four, he doesn’t fire the start.

It’s a simple and logical way to make sure everyone agrees: If an employee doesn’t raise their fist because they’re busy solving a problem, the merry-go-round just can’t move.

I realize that when investing, many people trade this way, perhaps without even realizing it.

We wait until all indicators are green before investing. If something is wrong (the specter of a recession, a stock market correction, rising interest rates, high inflation), then no action is taken.

However, what works great for La Ronde games doesn’t work for investment.

Waiting for the bad news to dissipate before investing or, even worse, selling our investments to “ride out the storm” is a very effective way of impoverishing ourselves.

Recently, a reader who has a large sum to invest told me that he wanted to wait. “I get the impression that all the experts agree, to a greater or lesser extent, that the decline will continue for some time,” he says. I tell myself: why not wait a little longer to buy even more at a discount? »

His reflection is perfectly understandable, logical and, I would add, human. The problem is that the market is not interested in what is understandable, logical or human.

The problem is that predicting market declines doesn’t work.

Almost all the pundits who talk about the markets hadn’t anticipated the magnitude of this year’s decline. Nor did most pundits believe that the Bank of Canada would raise its key rate six times so far, or that inflation would stay too high, or that house prices would fall.

But that is what we are experiencing today.

On the other hand, the Dow Jones stock index, which represents the 30 main American companies, has just closed the month of October with a rise of 13.96%, its best monthly rise since January 1976.

Exactly as the experts predicted, right?

It’s very counterintuitive, I agree, but when it comes to economics, and especially macroeconomics (unemployment rate, inflation, direction of markets, direction of interest rates), forecasts are not very useful to us.

“Just about everyone who cares about the stock market wants someone to tell them what they think the market is going to do,” wrote John Bogle, founder of financial products firm Vanguard. The demand being there, must be satisfied. »

Let us remember the situation we were experiencing in March 2020, at the beginning of the COVID-19 pandemic. The closure of borders. The closure of schools.

Financial markets had lost 30% of their value in just over a month, something unheard of since the 1930s.

The most widespread idea was that the crisis had only just begun (it was true) and that the bulk of the human and economic impacts had not yet been felt (it was also true).

However, the markets experienced their lowest point in the crisis in… March 2020, right during the toilet paper psychodrama.

An investor who panicked and dumped Canadian stocks in March 2020 to “weather the storm” would have missed out on a 6% rise for the year and a 64% rally from the stock market’s low to the present, even taking into account the falls that we have seen. in the markets this year.

Either way, waiting for “discounts” before investing doesn’t produce the exceptional returns you might expect.

In my most recent book, From zero to millionaireI quote an analysis by financial author Nick Maggiulli, who calculated that between 1970 and 2019, the annual return of an extremely lucky person who would have invested in the US market only when it had bottomed out after a crash would have been 0.4% higher than someone who just invested money every month, not worrying about the ups and downs.

The conclusion is clear: the best way to invest is to close your eyes, cover your ears, make your investments and try to forget about them.

Like everything in investing, it is simple, but it is not easy.

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