Good planning helps decision-making

If there is one investment skill everyone would like to possess, it would be knowing when to get into the investment markets — and when to get out again. It sounds simple enough. Buy before prices rise. Sell before they fall. The difficulty is that markets don’t announce what they’re about to do. Because they often look six to 18 months into the future, prices can move unexpectedly and swiftly, before the average investor is ready to commit.

Benjamin Graham famously observed that, in the short run, the market is a voting machine, but in the long run, it is a weighing machine. In the short term, markets vote on headlines, fear and optimism. A few weeks ago, investors were worrying about conflict in the Middle East and what it might mean for oil prices and economies. Earlier it was trade tariffs. Inflation and interest rates remain a focus. Go back a few years and Covid-19 dominated every conversation. There is always something to worry about.

That’s one of the reasons market timing is so appealing. Waiting until things become clearer feels like the sensible option. The problem is that by the time things feel clearer markets have already moved — by which stage there is a whole new range of worries to consider.

This doesn’t mean world events don’t matter. They do. Wars, recessions, elections and changes in government policy all influence markets. The problem is that nobody knows exactly how those events will unfold or how markets will respond. Sometimes bad news causes markets to rise because investors had feared something even worse. Sometimes good news sees markets fall because expectations were even higher. Trying to predict both the event and the market’s reaction is an exceptionally difficult task.

I’ve noticed over the years that people who try to time the market are usually less interested in chasing an opportunity than avoiding a mistake. They simply want to invest when it feels safe. Unfortunately, investing rarely feels safe, particularly because bad news sells newspapers. Predictions of recession, market crashes and financial disasters attract attention. If someone predicts enough crises, eventually they’ll be right. In the meantime, the quieter story — that thousands of businesses continue serving customers, developing new products and generating profits — rarely attracts the same attention.

That’s where Graham’s weighing machine comes in. Over time, markets filter out the noise and begin to weigh company profits, innovation, productivity and the ability of businesses to create wealth. The daily votes become less important than the long-term weight of the businesses themselves.

That’s why I think investors often ask the wrong question. Instead of asking, "When should I invest?", a better question is, "Do I have a plan that can cope with uncertainty?" A well-diversified portfolio, matched to your goals, timetable and risk tolerance, doesn’t rely on getting every prediction right. It accepts that uncertainty is part of investing rather than something that can be avoided.

Good financial planning doesn’t eliminate uncertainty. It helps you make good decisions despite it.

•Stephen McFarlane (www.centralwealth.nz) is a Certified Financial PlannerCM and a Director of Central Wealth Limited