Four Common Investment Mistakes

MARKET INSIGHTS

Many investors agree that buying what we believe in, selecting those we expect to win, and holding on over time are key ingredients for success in stocks. Yet we still give in to short-term urges. How can we take control?

The priority for most equity investors is to create long-term wealth. Why, then, do so many of them make their own financial lives more difficult than they need to be?

Take the US market, for instance. Did you know that the average holding period of shares on the New York Stock Exchange is just 5.5 months, compared with the 1950s peak of eight years?¹ What’s more, thanks to impatience and a greater prevalence of data and new tools, 50% of US equity market trading volumes are driven by high frequency trading.²

Even sell-side analysts often lack sufficient discipline. It might surprise you to know that while most analysts make earnings forecasts for one or maybe two years ahead, only around a quarter of that number make forecasts out to four years.³

These statistics appear to be at odds with the goal of generating wealth over time. But those individuals seeking long-term performance can use this to their advantage, since the popular desire for short-term returns seems to have left the long-term opportunity intact.

Four ways to regain discipline and patience

History tells us that the best investment approach is the simplest: do the research, choose wisely and selectively, and stay invested. This allows dividends and earnings growth to benefit from the power of compounding over time.

The reality in many cases is very different. Bombarded by fast-changing narratives and rapid swings between market outcomes that are re-shaping the investment landscape, we are increasingly seeing investors look for performance in the wrong places.

On the one hand, this is to be expected. The ups and downs in today’s new era have seen equities rise and fall, and rise again. On the other hand, the potential for volatility in the macro regime, in investment sentiment, across markets, and in geopolitical tension, will always exist.

Put simply, shortening investment time horizons to chase the possibility of marginal gains will often be at the expense of more consistent results over time.

chart of real-world fundamentals dictate returns over the long-term

Source: BlackRock Investment Institute, Refinitiv Datastream, dividends reinvested, 31 December 2023. The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results.

For investors who want to avoid reacting to the “noise” by trying quick fixes which are likely to damage portfolio returns, here are four common mistakes to avoid.

Ignore the ups and downs of markets

Don’t forget, it’s about “time in” rather than “timing” the market. Selling falling stocks out of fear will just lock-in losses, especially if the quality of a company remains sound. We seldom see a bad time to buy or own a great business.

It has become more urgent than ever to heed this call, with dynamics such as low economic growth and technological disruption contributing to a divergence between so-called ‘winners’ and ‘losers’ that further distorts the potential longer-term value of these same companies.

Don’t wait for markets to fall from all-time highs

Many apparent highs tend to be followed by a newer high. As a result, investors risk missing out on significant further gains if they see an all-time high as a signal to sell a position.

It’s also impossible to know when a pullback might come, how strong it will be, or how long it will last. In fact, the market might have already risen again (and moved even higher again) while a fearful investor is waiting to buy back in.

Don’t assume high valuations are bad or that low valuations will lead to good performance

Market valuations get too much attention among investors, especially since valuations are mean reverting. It is fundamentals, such as earnings growth, that dictate returns in the long run.

The BlackRock Global Unconstrained Equity (GLUE) Fund takes this into account. Its aggregated valuation has seen many meaningful short-term moves, sometimes leaving its price-to-earnings ratio below what it was at launch, despite the Fund being well up overall. In GLUE’s case, this shows the Fund is not expensive versus its history, and that business fundamentals have driven its performance, not a re-rating.

Avoid being influenced by the “sticky inflation” narrative

While the macro regime remains a hot topic, it appears that pressure is easing. In turn, inflation is becoming less of a focus in earnings calls.

In line with this, more attention should be on real-world fundamentals and sustainable earnings power.

Keeping it simple

Putting market fears and other dynamics aside, the sustainability of a company’s returns and the scale of its reinvestment opportunity over the long term is based on performance. Its quality will stand the test of time, whereas sticking to what’s popular will more likely distort the longer-term outcome.

Such resilience is a must-have when investing in the current volatile environment. It is more common at the moment in companies that offer defensive earnings and cash flow streams.

Ultimately, this reflects the importance of having conviction in great companies with deep moats, while keeping focused on the fact that concentration doesn’t necessarily equal higher risk – especially over the long term. The way forward? An approach that can invest where the best opportunities exist, unconstrained by geography or sector.