My eldest is learning to drive and I am becoming more conscious of my driving. Driving is one of those things that you do without consciously thinking about when to look in the rearview mirror. But I have now become aware of looking in the mirrors again. Although looking in all your mirrors is essential for safe driving, the most imperative action is to keep your eye on the road. Without that, driving is deadly.
Yet, with money, most people manage their affairs by looking backwards. They are essentially driving their money-vehicle by looking in the rearview mirror most of the time. When you analyse your spending, do you look backwards? In other words, do you look at where the money disappeared to or do you look forward and steer the money to where it needs to go? Do you make your investment decisions by looking at where you could have had the best returns last year or even over the past five years?
The data tells us that’s what most people do. Last year again, investors pulled billions out from the share market in South Africa and poured it into money markets presumably based on the poor return share investments showed in the years prior to that. “Why take the risk in shares, when you can get more in cash,” I hear them say. This kind of reactive behaviour is what happens all over the world. Worldwide, people pull out of investments based on poor past returns just when those investments return to favour and vice-versa. It’s why people who stay the course, or look forward, get rewarded handsomely over the long-term for the risk they take in the share market – more than one expects. Last year, the share market in South Africa delivered about double the return of the money market, just when investors left the share market in droves. Looking in the rearview mirror is a bad strategy in driving and in money. Beware! It’s always a good idea to keep your eyes on the road.