Investing: an art or just pure stress?

Posted on: 20 May 2009 by Gareth Hargreaves

The key to making good investment decisions is to think properly according to independent financial advisor Peter McGahan.

The key to making good investment decisions is to think properly. As rich and obvious as that may sound, consider that most financial decisions are indeed made emotionally.

Perhaps it’s the financial complications that make it so difficult. I covered investment psychology recently so no need to go over old ground, but there is evidence that many domestic investors have indeed left the noise behind them to make timely investment decisions.

Only a month ago the world was ending according to the press. Some poor MP mentioned she could see some green shoots and was hammered for being positive. I was puzzled. They highlighted all the background data and asked how she could be positive with such a backdrop. She reluctantly took back her positive remark. Have I missed something?

Whilst these individuals had their heads firmly in their expense claims the financial world, which they clearly struggle with, motored on.

Investing is like driving a car. You look ahead, with the odd glimpse behind.

Alternatively you could consider an approach of driving whilst looking straight at your groin and the rear view mirror. Which is the better thought?

At the end of March the Organisation for economic cooperation and development (OECD) advised that global GDP would plummet. ‘Wow, big headline’ I thought. ‘Time to bail out' might have been the next thought.

That is if you believe noise and journalistic drivel. One month later on the 11th of May the president of the European central bank (Mr JC Trichet) advises us that the downturn has now bottomed out. The OECD were just as quick to respond commenting that there were indeed signs of a pause in the economic slowdown in France, Italy, the UK and China.

Sorry gentlemen, where on earth did Armageddon go to? It was as recent as late April that all major central bankers and finance ministers gathered in Washington and the international monetary fund said we would have a sharp contraction this year followed by a sluggish recovery in 2010.

At the beginning of March the FTSE allshare stood at 1781 and on the 11th of May it stood at 2262. So whilst they rustled through their views of the agony of the world and expense forms, the FTSE all share returned 27% (at current rates that’s way over ten years growth in the building society). This return was achieved in the one month when all hell was declared.

And now we are advised that there is a return to confidence within the business and consumer’s sentiment. What a month!

Indeed JC Trichet had a one week turnaround in sentiment. Last week he was proclaiming that the 16 euro zone countries would be weak for some time, and only a week later he states that we were indeed at inflection point and that some countries were beyond inflection point.

I have given central bankers enough abuse but the general summary is that the pace of shrinking of global economies is indeed slowing. Aaah a sigh of relief for us all. Or is it?

Well now that doomsday has been cancelled, much of the capital sitting in zero yielding cash has made its way back into investments and supported markets.

Remember however that the reason the Bank of England has extended the quantitative easing from £75bn to £125bn is because they believe it’s needed.

It is generally felt now that equity prices are indeed moving north rather than south and as long as that sentiment is sustained the next self fulfilling prophesy will apply.

Be mindful that there will be more shocks and active management of your capital will be needed. This will be a bit like driving your 15 year old car out of a flood with misfires and splutters in abundance so make sure you take good investment advice.

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