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Sounds of the Seventies

Are the current economic challenges the same as the 1970s, and is it time to sell?

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Ian Millward
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Today’s rise in interest rates signals a return to normal business following the Queen’s funeral on Monday, but two events caught my eye last week that I wanted to comment on.

Clarence House’s decision to notify dozens of royal staff of the risk of redundancy, just three days after Charles III’s ascension to the throne. And Center Parcs (hastily reversed) announcement that it was going to turf all of its guest off-site on the day of the funeral.

What they both highlight is the very human ability for clever people to make poor decisions. As easy as it might be to think otherwise, decisions like these rarely happen because people lack intelligence or even compassion. Pressure does funny things to the brain and then poor information, or assumptions and our unseen cognitive biases, conspire to produce seemingly inexplicable results.

And what has that got to do with the 1970s?

With a global energy crisis, rampant inflation, strikes, threat of global war with Russia and even droughts and hose pipe bans, it is hard not to recognise the uncanny parallels between now and the dismal days of the 70’s.

Consumer confidence is at its lowest point since 1974 and Investment Association figures show money flooding out of funds in each of the last 6 months. The sectors that are bucking this trend, and actually attracting money, are money market funds, corporate bonds and UK gilts.

The clear implication is that investors are taking flight, either withdrawing and waiting for things to improve or switching into traditional safe havens and no doubt breathing a big sigh of relief as they do so.

The instinct to preserve what you have is very strong. Nevertheless, whilst perhaps not worthy of a seat on the board of Center Parcs, these are poor decisions. Despite the easy comparisons, this is not the 1970s and, in fact, the differences far outweigh any similarities. Causes are different, the economy is different, society is different, and outcomes will be different.

That is not a prediction of an immediate market turnaround, simply that short-term stock market calls are prone to backfire and successful investing relies on staying the course. The most common reason investors fail is losing their nerve and repeating the cycle of investing when the news is good, and markets are high, only to lose heart when the mood changes.

Those that learn this painful lesson often then fall at the second hurdle, by switching funds and sectors into whatever seems flavour of the month at the time. Often this involves filling your boots with whichever fund group or sector is flying high – which at the moment is driven by fear and searching out traditionally cautious investments such as gilts and corporate bonds.

However, with interest rates and inflation on the rise, this is a riskier decision than they perhaps realise.

Successful investing is easier than many people think. It involves getting some important decisions right and then avoiding serious mistakes. It involves balance, diversification, discipline and carefully managing costs. Staying the course is crucial and, whilst a diversified portfolio means that you will rarely be the biggest winner in any given year, it also means that you will never be the biggest loser. And, most importantly, it is the approach that usually wins over time.

You can read more in our Investing Made Simple and Cost of Advice guides.

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