Rules Should Silence Opinions

One of the nice things about modern life is we all get to share our opinions. They’re no longer restricted to just being unleashed on the company we keep, moderated by a switchboard operator at a radio station or cut for clarity by the editor at the newspaper. Got something to say? We can shout it out into the world, unfiltered across numerous platforms catering to our words.

The media and social media actively solicit our opinions because it helps keep them in business, and opinions have launched thousands of podcasts where people can yaffle on and tell us what they think. As much as being opinionated is now something of an economy, the validity of rampant opinion making has always had a question mark hanging over it. Back in the 1980’s Clint Eastwood’s Harry Callahan summed opinions up in his typically blunt fashion when someone offered a critique of his methods: “opinions are like rear-ends (edited for taste). Everyone has one.”

Those not charmed by Dirty Harry’s uncouth wisdom can find a more nuanced take from Roman emperor Marcus Aurelius back in 167 AD: “It is in our power to have no opinion about a thing, and not to be disturbed in our soul; for things themselves have no natural power to form our judgements.”

If we’re allowed to interpret Aurelius’ words, he’s suggesting opinions are a choice and no harm comes from not having one. Further, we’re not forced by anything external to have an opinion on anything.

Accepting this can be useful in life. Many pieces of information will zoom past our eyes and ears daily. Most we’ll have no control over or even any connection to. It will only be a chaotic mind that allows every piece of information to take up space in their head. Better to let that information zoom past without any engagement. In some areas this is harder said than done. Investing might be one of them, specifically because stories are framed around what various pieces of information “mean” for our house, mortgage, superannuation, retirement, money etc.

The past twelve to thirteen months have been stellar on equity markets, but twelve to thirteen months ago you’d struggle to find anyone with the opinion that double digit returns were ahead. Quite the opposite. Just over a year ago, a lot of investors had the opinion the best place to hide was in cash.

As interest rates crept up, a lot of attention turned to the risk-free rates on cash. There’s never any argument that cash is one of the best places to be for investors with a short-term horizon. It ensures the certainty of any short-term spending. House, car, holiday, renovations? Leave it in cash. If it comes with a 4% or 5% pa return, even better. Although it does need to be acknowledged inflation has been swallowing that return recently.

In Australia, 12 month returns to July 30 for the ASX 300 were 11.09%. Globally, the MSCI World ex Australia Index offered up 17.62%. Those are the facts, but opinions might have dictated whether an investor achieved a return like that, or not. Those with an opinion the world was heading to a bad place and the opinion central banks wouldn’t get inflation under control weren’t looking to invest 12 months ago. That meant sending new money to cash and getting twitchy that their existing portfolio should be liquidated for cash too.

What’s’ the best way to blunt troublesome opinions when investing?

Rules.

In contrast to a year ago, some investors are feeling good. That tailwind of gains has them feeling buoyant. Opinions have shifted. Who’d want to be in cash? It looks like Central Banks may have tamed inflation and the impact on equity markets has been minimal. It might be the start of an even bigger rally? You’d be a fool to make changes to your portfolio now! Keep riding the wave!

We’ve heard such opinions recently. Just like we heard the opinion cash was the place to be a year ago.

As advisers, we don’t know. And we don’t have opinions. Instead, we have rules. This should be the default for all investors. Managing a portfolio according to rules negates the need to have an opinion. It dispenses with the burden of trying to get something right. Feelings don’t interfere or disrupt the process.

Decisions are made based on financial targets, market targets, or changes in circumstances or goals. When those targets are reached, the portfolio can change because it’s a step closer to a goal. When someone’s circumstances change, their portfolio can be rebalanced in the most tax efficient way, so it lines up with their circumstances or change in goals.

Opinions aren’t needed when rules are in place.

There is an old Taoist story of a farmer and his horse, but we’ve repurposed it slightly to highlight how to let go of the need to have an opinion when investing.

A retired investor had been living off his portfolio for many years. One day there was news of a catastrophic global event. Upon hearing the news, his neighbours came to visit. “Such bad luck for the world, it looks like the economy and your portfolio will be ruined,” they said sympathetically.

“Maybe,” the old investor replied.

The next month government and central banks co-ordinated to offset the problems of the catastrophe, bringing relief to society and businesses. “How wonderful for the world, a salve for the economy and your portfolio should recover and be fruitful,” the neighbours exclaimed.

“Maybe,” replied the old investor.

The next year, news was emerging that inflation was getting out of control due to the government and central banks’ actions. The neighbours again came to bring the news and offer their sympathy suggesting this news would be “unfortunate” for his portfolio, and worse, his returns may not cover the rising cost of everything.

“Maybe,” answered the old investor.

A year later, central banks appeared to be successfully dealing with inflation without causing too much economic havoc. After a brief dip, financial markets took the interest rate rises in their stride and had been steadily moving upward. The investor’s portfolio was still covering his living costs. The neighbours congratulated the investor on how well things had turned out.

“Maybe,” said the investor.

There’s nothing wrong with having an opinion. They can start conversations; they can be interesting to listen to, and life would be bland without them. But we’re not required to have an opinion on everything, and in some areas they’re a detriment.

Investing is one place where opinions can be left at the door. Rules are more reliable.