I recently watched a film on TV, one with a clever twist at the end. I have seen it before, a few years ago, the only problem was I could not quite remember the ending – I expect I just nodded off towards the end! But now the ending bugged me, and whilst the wonders of modern media meant I could have just fast-forwarded to the closing minutes, I felt obliged to watch it all, so I could get the whole story and benefit from the full force of the final twist.
As with many things in my life (OK too many), it set me thinking about parallels with the investment world.
Most people have investment memories that are too short. By this, I mean that we only remember the last few years, rather than the last few decades. We get overly stuck in the present, draw a conclusion and leave it at that. We wait for things to change before drawing a new conclusion rather than anticipating the next change before it happens.
The marketeers of the investment world know this very well, and unfortunately are all too willing to play to it. A story that mirrors recent experience is much easier to tell than one which conflicts with our short term investment memory. And given that financial products are not tangible, a good story is key to attracting new investors. It is much easier to promote a low risk investment just after a stock market crash, and a risky investment is like a magnet for money after it has had a long period of growth.
The advantage of a good story is that it is easier to remember (unless, like me, you end up snoozing in front of the TV).
For example, can you remember:
how much the FTSE fell by in 2001?
how much interest rates were in 1985?
Most people cannot with complete accuracy, unless they lost their house or lost a fortune. But they could say when and how they met their husband/wife; how they worked to pay the mortgage whilst at the same time bringing up the kids, and the whole story of how their lives have moved on since.
The best way to prevent your investment decisions from turning into a nasty twist is to make sure you get the whole story, and line it up nicely with your own. That way all the financial details fade into the background leaving you to enjoy the memories of the good stuff.
Partner and Investment Director
Please remember: Investment values can fall as well as rise, you capital is not guaranteed and you may get less back than you originally invested