Preparing for the Future? Don’t Bet On It

Why do so many market commentators talk about betting when referring to investing? The investment industry is often infused with the symbolism of a casino – a representation that becomes all too real when investors get wiped out.

As always, investors must be careful not to get carried along by the rhetoric of gambling when they are preparing for their future. Regrettably, recent headlines and stories in the media are not reassuring for those who value a sensible approach during this difficult time.

“H2O Asset Management has sent a letter to clients warning that its funds face ‘surprisingly large’ losses because of bets on bonds and currencies that turned sour during volatile market swings in recent days.” – in the Financial Times


“Yet another Woodford bet hits the rocks: Yorkshire-based 3D printing firm Metalysis collapses into administration” – in This is Money

and as the Wirecard scandal has shown…

“Should fund managers bet big?” – in Morningstar

Is it unsurprising that many investors feel they need to make bets to get ahead?

A surge in prices – and irrational behaviour

Taking advantage of opportunities is one thing, but not at any cost. Most investors simply want reasonable returns over time to help them effectively meet their future goals – whether that is securing a property, saving for education or a comfortable retirement.

Yet so many media-driven conversations amplify the possibilities – both negative and positive – about investing (or not), and the fear of missing out may cause individuals to act rashly and do the wrong things with their money.

For example, the deeply indebted car rental company Hertz recently filed for a form of bankruptcy in the US, with its stock price tumbling from over $20 in February to around 50 cents in June. But then investors piled in – sending the price surging almost 10 times before it slipped again. The company’s weak fundamentals hadn’t shifted. What’s going on?

In search of opportunities

It is reasonable to assume that some investors – who may have taken a major hit in the recent market crash – are taking more risk to recover some of their losses. There is also speculation that some sports bettors, deprived of their usual outlets, have turned to the stock markets to gain the highs (and suffer the lows) associated with betting, as this article in Investment Magazine illustrates.

A Bloomberg report highlighted the rush of newbie investors to a trading app from Robinhood Financial – and the often heartbreak that goes with uninformed trading activity. The article asked whether the app is “appealing to those seeking to gamble at a time when casinos are closed and major sporting events are cancelled”.

While this new influx of retail investors may not be enough to meaningfully move the dial on equity markets, the tech-driven Nasdaq market in the US did reach a fresh high recently. We always encourage investors to ignore the hype or trend of the moment (whether cannabis, ailing car rental firms or Bitcoin) and instead to follow a less thrilling path, but one which offers a much more realistic chance of investors meeting their long-term goals.

So what should investors do now?

It is understandable that investors may be troubled by recent losses. Yet we recommend patience – most stock markets usually prove resilient in the long term and overreacting to events and trying to guess the direction of markets at any given time will likely mean investors missing out.

We are sceptical about the abilities of active money managers to outperform after an economic or market downturn, a deficiency they have demonstrated time and time again – so why would you pay for the privilege of someone often making questionable bets on your behalf?

Taking a punt with clients’ money is the antithesis of what we stand for at Netwealth. We try to ignore short-term volatility and instead focus on the strategic mix of assets to invest in over the long term as the main driver of our portfolio returns.

Investing shouldn’t be seen as a way to gamble on your future with money you can afford to lose – that’s what casinos are for.

Please remember that when investing your capital is at risk.

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