Why investors need an historical perspective
- Robin Powell
- Sep 23, 2024
- 4 min read
Updated: May 23
Most people are hardwired to focus on the present. That may be useful in everyday life — but when it comes to investing, a historical perspective can make all the difference. Short-term thinking often leads to knee-jerk reactions that undermine long-term financial goals.
According to financial historian Mark Higgins, taking a long-term view helps investors stay disciplined even when markets appear to be in crisis. Almost every financial event has a precedent, and while outcomes can vary, history shows that markets are remarkably resilient over time.
Rather than trying to time the market or anticipate bubbles, Higgins urges investors to build a consistent strategy and rebalance when needed. That, he says, is the approach financial history most often rewards.
KEY TAKEAWAYS
1. A historical perspective helps steady the hand
Understanding past market crises and recoveries makes it easier to stay calm and committed to long-term investment plans.
2. Market crashes are not new
Panics and downturns have happened throughout history. They are rarely as unique or catastrophic as they may seem in the moment.
3. Stick to strategy and rebalance
Trying to time markets is risky and rarely successful. A steady asset allocation and disciplined rebalancing work better over time.
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TRANSCRIPT
Robin Powell: Human beings have evolved to focus on what’s happening here and now, right in front of us.
But investors can hugely benefit from taking a long-term historical perspective.
Mark Higgins is a financial historian and investment consultant.
Mark Higgins: A lot of what happens in the present, it's not necessarily a repetition of history, but it is a combination of things that have been seen before.
It's very rare to see something that doesn't have some kind of precedent. And if you know that it is very hard to set a strategy and stick to it for the long term. But understanding financial history enables you to keep a steady hand.
RP: One of the reasons why investors fail to achieve their goals is that they take fright when bad news causes markets to fall sharply.
But things are rarely as bleak as they seem.
MH: You read newspapers from the 1800s, in the early 1900s, every generation thinks that it's the end.
You know, and to be perfectly honest with you, some had a better or a lot had a better argument than we did. If you were making that argument in 1939, you know, I could understand it more than I can today. And that doesn't mean we don't have problems. We do. But I would argue that the ones today are more manageable.
I really do believe them, they were in the past. So this is one of the reasons to study financial history. The more you look back, the less scared you get in terms of the future. That's not to say something disastrous can't happen. It can. It's not to say there are going to be victims.
There will. But at the end of the day, I think we do tend to be overly pessimistic based on our limited life experience and our short term perspective.
RP: Stock market crashes and corrections are virtually inevitable. But no one knows when they’ll happen, or how severe they’ll be.
MH: That's the tough thing about bubbles, even if you suspect one is forming.
How do you profit from it? You don't know how long it's going to run up. You don't know when it's going to reverse. So even if you can see a bubble and I think you can get a sense of a bubble, you may not be able to predict it, but there are some common signs. It's impossible and they're foolish to try to profit from it.
And this is, again, the best approach that I've seen is to create a stable asset allocation that is suitable for your objectives and stick with that and rebalance. I mean, there's certainly an opportunity when there are major manias and crashes to rebalance to that target. But you know, trying to time the market is just there's a graveyard littered with people who have attempted at that.
RP: Mark Higgins says that one of the most important things he’s learned from financial market history is that people tend to overreact both to good news and to bad.
MH: We've had very bad times and people tend to get spooked. We're probably enthusiastic, buy things that don't last, so I don't think you should try to time the market when there's a crash, but rebalancing is appropriate and just sticking to your long term strategy.
And if you can do that and rely on index funds, you're going to do better than most.
RP: So don’t over-react. In fact, don’t react at all. Markets will always fluctuate in the short term. Having a long-term focus is the best approach.
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