Welcome to honest money .
We're doing a talk about investments today and and this is going to be a little bit of about psychology and and your money and how you think about investing and and so , you know , get comfortable on the couch , sit back and and and listen to , listen to the conversation and and let's see if we can help you make some smart decisions around your investments and
maybe avoid some some not so smart decisions . And if you hear a little bit of frustration , my voice today , it's there . One of the things that bothers me about , about investing and especially talking to investors , is we kind of stuck in this pattern as investors and this is a global phenomenon .
This is , you know , whether you're 22 year and starting out , or you know 62 or 82 and and you know deep experience in the investment markets , this applies .
So what happens is we'll watch our investments as , as investors , and , and especially what's happening in the last year or two , we start to form kind of a pattern in our brains to say that whatever happened last year is probably going to happen next year .
Whatever's happened over the last three years , that's probably what's going to happen into the , into the next three years . So we kind of , you know , form these patterns and and then , especially when things have gone very well for a year , we think , okay , well , that's going to happen again . You know the last year was pumping . Stock markets were up 20% .
You know , I'm expecting they'll go up 20% again this year . So I'm going to change my whole strategy to follow what happened last year and and you know , especially with stock markets , it actually applies even more when we talk about specific sectors .
So , if we just talk about 2023 as an example , there were basically seven shares that drove the world's stock markets that they actually have a name that called the magnificent seven and and those are primarily enormous tech companies , mostly based in the US , and they had a phenomenal year from a stock market performance point of view .
Exactly why it doesn't really matter that . I think the point is that that investors started to watch their share prices go up .
Those seven companies , and , and so investors bought more and more and more of those shares , and and these are enormous companies that just shut up in in value , and and so you know they did incredibly well and and if you look at the index in America , you know the top 500 shares in America is called the S&P 500 . And you looked at the performance in 2023 .
You would say what you ? That was a phenomenal year . You know the markets did incredibly well . You know kind of 18 to 25% , depending on which markets you looked at around the world .
But when investors go and look at their , their statements , you know if , let's say , you own a global balanced unit trust or a global balanced ETF , your investment might not have done nearly as well .
And then you're saying to yourself well , hang on , you know why do I own this global balanced fund when actually you know the S&P did so well and actually the NASDAQ did even better ? Why don't I just sell everything I own and just buy the NASDAQ index to get more exposure to those magnificent seven ?
Because they did so well last year , I'm sure they're going to do incredibly well in 24 and 25 . And and so that's what investors do , and they do it repeatedly . They do it with tech , they do it with mining if mining is going well , they do it in so many different sectors and it's usually around shares more than anything else .
And then the same applies when markets fall apart . So when things go really badly and stock markets go down for three or four years , investors start to say you know what stock markets are a lousy place to make money .
Whenever I buy shares that go down , you know I don't know if you've heard yourself say that or all of that and then what investors do is they sell those shares and they sell their stock markets , and , whether it's individual shares or the index , they kind of do it as a pattern , they do it as a collective , and so they sell in bulk and then the stock
market goes down a bit more and then all of a sudden , things start to turn , you know , because the professional investors and the kind of more experienced savvy investors look around and they say you know what the stock market's offering ? Incredible value , it's really cheap .
And so the early investors start to buy and and , and they might be buying when the markets are still going down a bit and , and you know it's a bit tough to be buying things when , when you're losing value , and even more tough when everyone else around you and the media is saying gee , you know it's blood in the street , sell shares .
You know the stock market's a terrible place , but the savvy investors just keep buying Twitter , liar , or and so eventually they start to get rewarded because those cheap companies that they own are paying dividends , generating growing profits every single year , and so those investors start to make more and more money and then share prices start to recover and they
start to grow and they grow , and they grow and at some point the stock market starts to perform really well and after about three or four years of great performance , everyone else wakes up to it and goes gee stock market's , hoping maybe I should sell my cash , which has done nothing for me in the last four or five years , and put that into the stock market .
And they usually do it when the stock market's really expensive . And then all of a sudden the stock market goes south because the savvy investors start to say there's no more value in the market .
I think the market's really expensive , I'm going to cash out and put my money elsewhere , and then the market goes down , and so that pattern repeats itself over and over and over again . It's just really a destructive pattern of investor behavior .
I feel frustrated because I can see it happen over and over again and I can't get away or find a way to convince people who are in high quality businesses that are just cheap to stay invested . And equally , I can't seem to convince everybody that's chasing now , for example , the Magnificent Seven chasing those returns to tell them to watch out .
And I think that's why we , kind of on the honest money , we preach diversification a lot , because I'm not saying you shouldn't own big tech companies . There's some fantastic businesses , I think . If you just look at what Microsoft's done in the last two decades a phenomenal company .
Apple's a phenomenal company and I just think that there are really high quality businesses . But I'm not going to go and take all of my money and put it in there . Why ? Because those companies can have in value . Their share prices might drop by 50% , so you could have $100,000 in there and in a year it's worth $50,000 .
It hasn't changed the quality of the company Still fantastic companies but people have worked it up to the fact that the share prices are just phenomenally expensive . So to me , diversification makes a huge amount of sense when you're not a crystal ball investor and the truth is no one's got a crystal ball that works all the time .
In fact , no one's got a crystal ball that works any point in time . What might happen is you might be really lucky , you might flip your coin and you choose heads and the market goes up and you go great , I'm a genius , I'm going to keep this coin .
Then you flip the coin again next year and the market goes up again and you say you see my lucky coin , me and this coin we're market geniuses . But there'll be a year when you flip the coin and the coin will say the market's going to go up , and that's the year it goes down .
And suddenly you don't feel so clever and so you throw your coin away and you try again , and my view is that's just not sensible . The sensible thing to do is have a broad exposure to a lot of different investment assets across a lot of different markets .
In other words , don't put all your money in America , but equally don't put all your money in South Africa or in Taiwan or in China . Have a big global exposure . The simplest way to do that is a world index . It literally owns the world , and if America's pumping and the tech shares are pumping , you'll get some of the benefit from that .
But equally you'll have exposure to Europe , where maybe Europe is really cheap and not pumping , but it might be the market that pumps next year and then you'll be in there . But if you've got all your money in tech shares right now , you're going to miss out on maybe the potential recovery in Europe or the phenomenal recovery in India or something like that .
I'm not sure . That's not a prediction and then you , equally , will have the catastrophe when tech shares fall over in America I'm not saying that's going to happen now , but just valuations count . When sectors and companies are phenomenally expensive , they can get more expensive , they can keep going up for a while , but always they're correct .
Always valuations start to weigh in on a company and share prices turn to make those companies more valuable again , and the problem is we just don't know when .
So if you own a global balanced portfolio now and it hasn't done as well as the tech shares and your friends on the whether you're mountain biking or golfing or brying , and someone's telling you about our amazing their investments were last year and they're up 25% and you're only up five , perhaps just wonder whether that 25% is going to fall over , you know
whether those people are going to see their big losses in their portfolios In the in the months or years ahead and your , your portfolio keeps growing at 10 or 12% . You know who's the genius then ? And I think you know , understand that the people are really vocal about how wonderfully they're doing with their investments .
Those are exactly the same people that say absolutely nothing when they have a lousy , so worrying about what everyone else is getting around you . That's called FOMO . It's a fantastic way to lose money . Just understand that . I'm gonna repeat that it's a fantastic way to lose money .
What you need to do is build a strategy that suits you , have proper diversification and then keep growing your money consistently over time and don't worry about what everyone else is doing .
The truth is that the loudest people probably have the least amount of money and the biggest amount of debt and they want to feel good about themselves , so they brag about something . The wealthiest people out there often they call them the quiet millionaires .
You know that they've got Very good investment portfolios , they're doing very well and they feel no need to brag about it , and so you're not going to see those people on social media With their bling . You know art , fits and cars and stuff . They're just .
They're living their best lives and actually doing what everyone else wants to do , and so forget about what everyone else is doing and just stick to a strategy that works for you and , most importantly , don't get over excited when one part of the market is absolutely booming and you don't have all your money in there , and don't get too depressed when a portion of
your portfolio is going down . Diversification is good , and diversification means that some of your money will always be performing not as well as other parts of your money . That's , that's okay . That's that's the whole point about investing is it's slow and consistent growth over long periods of time .
It's it's compounding little bits of gains year after year after year , and when you look back over five and ten years , you will have a lot more money than those that have made 30% in one year and then lost 30% the next year . It takes it takes phenomenal luck to be a wealthy investor when your portfolio is doing plus 30 minus 20 , plus 20 minus 50 .
You know , and you do that all the time , you know . So chasing returns is just a great way to lose money and a horrible way to live . So I hope that helps . You can get off the couch now , and , and , and . If you want to know more about this , there's a fantastic book called same as ever .
I'll repeat that the books called same as ever by Morgan Hassell , and he talks a lot about what doesn't change , how humans don't change and how we can take advantage of human behavior as an investor to make money for ourselves . And I encourage you to read that book if you're getting tempted by by chasing the former investments of the moment .
Thanks for listening .