- Financial Planning,
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"I Keep six honest serving-men: (They taught me all I knew) Their names are What and Where and When And How and Why and Who" ~ From The Elephant’s Child by Rudyard Kipling
Kipling’s words are often recommended to aspiring journalists by their editors. By asking those six questions they can make their way to the root of most stories. Perhaps the most common of these is the one that is sometimes dreaded by parents, "why?" The curiosity of children is a wonderful thing, and their view of the world is formed by constant use of the word, why?
The use of these interrogatives is not confined to those journalists who cover crime and police matters. Financial journalists also want the whole story. In particular, where markets are concerned, they have to understand why things have happened; when the market goes down there has to be a reason that they can explain to their readers. Perhaps they believe that, armed with this knowledge, investors can look out for a repeat of it and avoid it.
The problem is that commentators will often give different reasons for the same scenario, one or more of which may be the reason for the downturn the market is experiencing (let’s face it, they are only really interested in markets when they go down). In addition, they never hesitate to explain to us why certain events will result in a market downturn; there were widespread predictions that the Brexit vote and the election to US president of Donald Trump would result in devastation to capital markets. In reality, the opposite happened.
The Guardian alone was able to give us five reasons in their edition of 6 February: –
Rising wages in the US and the resulting spectre of inflation
Interest rates – been too low for too long and they must rise.
Increasing US deficit – currently at $1 trillion
Profit-taking – those who think the market has risen too quickly too fast are banking their gains.
Machine trading – usually trotted out at times like this
PBS, the American broadcaster had five of their own, almost completely different, including the rise of crypto currencies, Robert Shiller’s Cape Index (which, as far as I know has recommended selling US equities constantly since it first existed), "The Bondcano " (10 out of 10 for creativity) – too many people buying bonds and Baby Boomers living too long. To these you could add, growing tension between Russia and Western Europe, Donald Trump’s protectionist instincts and Aston Villa’s loss of form in the Championship.
To enlist the help of one of Kipling’s other six honest serving-men, I would like to pose the question, how? How does answering the question, why? help any long-term investor? The short answer is of course, it does not. You’re not going to change your long-term investment policy because a journalist with space to fill, has come up with a series of reasons why the market just did what it did, or why it might do something in the future. As usual, our advice is to ignore the noise in the media, accept market volatility as part of the landscape and continue doing those things you really enjoy.