Hindsight is never an exact science

Distortion is the action of distorting or the state of being distorted. Alternatively, it is the action of giving a misleading account or impression. We are living in a world where the trend of focused investing is becoming more prevalent. Gone are the days where a policyholder hands over control to a fund manager without any interaction, or some level of control. The policyholder of today wants to be informed and wants to be able to exert some measure of control over his or her investment, no matter how small.

Background noise

Being informed is not a bad thing. However, too much information can become background noise, which leads to distortion.

A report by time.com points out some of the lessons from 2016 which proves this point, especially for members of the public who are active participants on the stock markets.

In January 2016, stocks in the US got off to their worst start to a year ever, dropping 6% over the first five trading days. There were concerns about shaky markets abroad and predictions from some analysts that US stocks could be headed for a major setback.

So scaling back – and possibly bailing out of stocks completely—might have seemed a no brainer.

The Brexit effect

Then Brexit happened, a period of time when the world collectively held its breath wondering what the fallout of Britain opting to leave the European Union would be.

The times.com report pointed out that investors around the globe dumped stocks and rushed into traditional safe havens like gold and treasury securities. Given the level of angst in the aftermath of that decision, anyone wary of seeing their retirement nest egg take a hit might easily have joined the exodus from equities. The fact that the Pound lost so much ground on the eve of Brexit gave credence to this belief.

Trump in the big house

The biggest shock of 2016 was undoubtedly the election of Donald Trump as the 45^th President of the United States. 

The times.com report added that the Trump election was a development that, to hear some analysts tell it, was virtually certain to trigger a stock market implosion. The report stated further that prior to the election, Justin Wolters of the University of Michigan and Eric Zitzewitz of Dartmouth published a paper that, based on trading in S&P futures and other factors, estimated a Trump victory could knock 10% to 15% off the value of stocks in the US and around the globe.

Getting it wrong

This is like setting a field in cricket based on where a batsman played his last shot, you will chase your tail because you are relying on a poorly defined strategy. If you are chasing investments because they lose traction, what happens when they gain said traction?

After the slump of January 2016, the times.com report rightly pointed out that US stocks rallied later on in the year and showed some impressive gains. Investors who exited these stocks because of a knee jerk reaction now faced the prospect of losing out on this recovery. 

Once the dust settled following the Brexit decision, it was clear that a full withdrawal from the Union would take at least two years from the date that Theresa May signs Article 50, which is expected to take place in March this year.

This proved to be the encouragement that was needed for equities to rally on the London Stock Exchange. Again, those who dumped equities now faced the prospect of being left out in the cold as the rally moved onward and upward.

The only 2016 event that we will need to see the effects of, is Trump’s election.  He has been very outspoken on what his presidential policies will be, but whether he gets the backing from the Senate will determine whether the US stock market is in for a bumpy ride or not.

Editor’s Thoughts:
Hindsight is 20/20 vison. Some may say they made their investment decisions based on what they saw in that moment. The problem is those moments don’t hold permanent effects and markets will most likely correct themselves after events that are not as prolonged as a financial crisis. Focused investing requires discipline, no matter what distortion you experience. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.