Janette Rutterford/ Open University Business School
RP: One of the main reasons why people make bad investment decisions is
that they lose sight of what they’re investing for.
For most of us, the ultimate goal is to ensure that we have enough money to
support us in retirement and that we don’t run out before we die.
In fact, previous generations were rather better at saving and investing for the
long-term than we are.
Janette Rutterford is Professor of Finance at the Open University Business
JR: In the old days, people used to have no pension so they saved for their
pensions. And you see what happened, if you look at their portfolios: as they
had more money, they added shares to their portfolio, and then as they
retired and had to live off it, they would start selling down. But they had no
intention of selling in the short-term, because they needed that money for the
long-term. The problem we’ve got now is that a lot of people are using shares
as a speculative asset because they’ve got pensions, they’ve got the security
of a salary which you didn’t necessarily have in the old days. So they’re
treating shares as a speculation short-term. Fair enough, there’s nothing
wrong with that. It’s just you’re not going to get the steady returns you’re
going to get if you invest for their long-term.
RP: One advantage our ancestors had is that they weren’t constantly
distracted as we are by the 24-hour news media.
When markets are falling and you’re reading about it in the newspapers and
you’re seeing people talk about it on television, it can be very tempting to do
something. Usually though, the best course of action is to sit tight.
JR: We all have behavioral biases, that’s the problem. We like to see order
out of chaos. We also don’t like to admit that we’re wrong, so our losses.
We’re reluctant to sell our losses, because we think they’re going to go back
up. They’re not necessarily going to go back up. We sell things that have
gone up, when maybe we should hold on to them. So all these things are
biases in our behavior which come from generations back of behavior and
there’s not much we can do about it. But the best thing to do is to just keep
your portfolio long-term and, on the whole, you will do reasonably well.
RP: A useful exercise for investors who are tempted to try to time the market
is to look back through market history.
Patient, diversified investors have almost always been rewarded.
JR: If you look at shares and bonds and cash over 15 or 20 years. It hardly
ever happens that shares don’t do best out of that because, over the long term,
shares will give you a higher return because you’re taking more risk in
the short-term volatility sense. The share price can go up and down. If you
have to sell on the day, you might not make as much money as you expected.
But in the long run, you will do very well with shares because, on the whole,
they earn a higher return. So if you’re looking at 15 or 20 years – or even for
your pension, it could be 40 or 50 years – then shares should be a part of
RP: So, we should try to learn from our ancestors and focus on the long-term
prize. Patience and discipline are hugely important qualities for investors to