9 December 2020
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In this two-part special episode, podcast hosts Dan Mikulskis and Mary Spencer invite Jacob Shah onto the show to reflect on the markets for this year.
- Jacob's recent blog Uncorrelated reflections
Reflections on 2020
- 2020 went by so fast and the market moves were so quick this year.
- There were very little investment actions actually taken this year.
- The ability to be dynamic and flexible can be valuable.
How did the impact of the crisis play out in terms of discussions with clients?
There were lots of discussion, but less actions than Jacob thought.
Why is that?
He thinks it could be a variety of factors:
- Perhaps we didn’t need to? It was already well positioned, hedges set up to withstand.
- Or it could be behavioural bias - Loss aversion or judging action more harshly than the inaction of doing nothing.
Were markets overreacting?
- vaccine news – wasn’t it expected anyway, just a few months later?
- Rebalancing can help you avoid behavioural biases in your investments.
- Triggers can help you capitalise on unexpected good news.
- One thing this time around was on the operational side: ie instruction letters, faxes etc.
- Has it brought an end to some of those archaic practices of fax machines etc? That would be a positive!
The differences between institutional and individual behavioural biases
- Institutions are less likely to make snap rash decisions.
- But it might make you less flexible and too anchored.
The risk on individuals is action and the risk on institutions is inaction
- The role of individuals trading decisions in the crisis, and Robinhood etc.
- There was central bank support this year and liquidity crunch smaller / shorter this time vs previous crisis.
How have this year’s events affected setting asset class return assumptions?
- It's always difficult, but a forward-looking and long term focus helps.
- Avoid being too focused on recent performance.
- There are triggers to help you take advantage of market noise on the upside but you need a clear objective to know.
One thing to take away
- Value in having an agreed-upon process you can rely on in volatile markets to make decisions and avoid behavioural biases.
Underappreciated thing about investing
- How few investment actions took place, and how many clients today are not in a very different position to a year ago.
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