A few weeks ago I visited the Hyrcania fortress in the Judean desert with my family. The desert is filled with wildlife, but for the most part it is camouflaged, hidden from the view of the occasional tourist. Historians believe the area was a key trade route that played a major part in middle eastern commerce and even politics, but nowadays there is an incredible feeling of emptiness and solitude. However, when you look around and see a caravan of about 60 camels, it is very easy to imagine the time when it was a major trade route, with camels transporting spices and other commodities. Being a financial advisor obviously my mind went to imagining how their economy looked and operated a couple of thousand years ago.
I’m convinced they felt pretty advanced and confident in their trade and barter standards back then, and yet those methods didn’t stand the test of time. Similarly, the great empires of thousands of years ago may be very well documented but they are no longer the super-powers of today, and haven’t been for millennia.
At this point you may well be wondering where I am going with all this, and my answer is that I think we need to realize that sometimes things change irrevocably, especially when related to investing and markets.
We often hear people describe how things were ‘in the past’. They can be talking about everything from housing markets to commodities to the behavior of kids nowadays. People use their experience, memory or history to shape their expectations. However, financial institutions are obligated to tell investors that a fund’s ‘past performance does not necessarily predict future results’. And the truth is that this critical phrase ‘past performance does not necessarily predict future results’ is more than just a necessary disclaimer.
There is a very strong tendency to ignore this statement and invest based exclusively on past performance, and that makes sense as in many cases it’s the only real certain data that is available to an investor. But while objects in motion stay in motion, investment returns do not stay consistent over long periods of time. Savvy investors cannot assume that their investment will offer the same return as previous years. Just because we have seen real estate prices in Israel grow annually for 14 years, does not mean they will increase next year. Nor does a bull stock market in the USA that has seen abnormally higher than average returns since 2008, necessarily need to continue. We need to take our investing decision to a deeper level.
We assume that trends will continue with minor adjustments but that is not necessarily correct. And therein lies the inherent difficulty of investing. We often base our investments on past results, rather than trying to invest in areas that will become the new wave. As Wayne Gretzky is famously quoted as saying “I skate to where the puck is going to be, not where it has been”.
What do we do when we don’t necessarily know what the next big thing will be and don’t have the time to become a focused professional investor? We have to find another way of doing things, and that other way is diversification! When it comes to your savings you can protect yourself and give yourself the ability to produce long term consistent returns in your investment portfolio by diversifying your investments and staying consistent with long-term investing principles. In addition to spreading the risk to try and minimize losses in the markets of today, you also are setting yourself up so that if there are radical changes you will be somewhat protected if you are exposed to a wide range of companies, industries, currencies etc.
English-speaking ex-pats in Israel often face a major decision of whether to invest in the Israeli stock market, in shekels, or to invest abroad in major world indices, like the major US indices. Rather than relying on past performance to decide which market to be in, you can ensure that your portfolio contains both exposure to Israeli companies and to the shekel (because by living in Israel you will be impacted by what happens to the local currency and market), but also continues to have exposure to markets around the world. The same thinking applies to those facing currency challenges, who aren’t sure when and how much to convert. Hindsight gives us 20/20 vision, but without that luxury when looking ahead, diversification is a solution.
When we had finished viewing the Hyrcania fortress, an hour and a half after our glimpse into the past in the desert, we were in a bustling, present-day Jerusalem. We looked around wiser, with the knowledge that everything can change radically, and humankind’s existence has not and will not necessarily always remain the same. It behooves us to prepare ourselves for any eventuality.