Q & A with Janette Rutterford: Some reminders from market history

Posted by Sam Willet on June 26, 2019

Q & A with Janette Rutterford: Some reminders from market history

 

JANETTE RUTTERFORD is Emeritus Professor of Finance at the Open University Business School. Janette has also taught finance at the London School of Economics, and worked in corporate finance at N. M. Rothschild & Sons Limited.

Amongst other subjects, Janette has focused on investment management, and the history of finance, investment and saving. She has written a number of books and articles, including An Introduction to Stock Exchange Investment, which ran to a third edition.

Janette has also been involved in the development of three MOOCs (online learning courses): Managing My Money, Managing My Investments, and Managing My Investment Journey.

Janette was kind enough to welcome us into her London home for an interview, which will be used in an upcoming video series. In it, we focused on the lessons investors can take from market history.

 

How easy or hard is it to predict when markets are about to rise or fall?

It’s almost impossible because, if you think that markets are efficient, that means that share prices reflect everything that you or I know about the share. All the information that we’ve got has already been priced in, so how would we know what’s going to happen tomorrow? Because tomorrow, we might have good news, and the price will go up,  or we might have bad news,  and the price will go down. But the whole point is that it will be new news and we can’t forecast it.

 

So why do you think people are so tempted to give it a go, given that, as you say, it’s so hard to do?

Because if you could do it, you would be very rich. I found a letter written in 1858 in my archives, where the guy essentially says: “If we knew what was going to happen, we would be rich.” That was in 1858, so clearly it’s been something that people have wanted to do for a very long time.

 

So why do we get the idea in our heads that it’s actually easier than it really is?

Because the human brain likes to find a pattern, a sense to things. Randomness doesn’t suit us. We don’t like to think that tomorrow, what’s going to happen to us is entirely random. We like to think we’ve got control over the world. So, that’s the problem. We think we can see patterns in past share prices, so we think, “if we bought here last time, we’d have money; so why don’t we do the same thing this time with the same picture? We’ll be rich!” But, of course, that’s a different environment, and different things will happen and you won’t make money.

 

What’s the best thing to do when markets are volatile?

Sit it out, if you’re a long-term investor. Basically, individuals who’ve got short-term horizons shouldn’t be buying shares because it’s too risky.

 

It’s human nature, when we see markets falling, to be tempted to do something. But what is the best course of action?

Ee all have behavioural biases. That’s the problem. We like to see order out of chaos. We also don’t like to admit that we’re wrong. We’re reluctant to sell our losses because we think that they’re going to go back up… but they’re not necessarily going to go back up. We sell things that have gone up, when maybe we should hold on to them. So all these things are biases in our behaviour, which come from generations back, and there’s not much we can do about it. But the best thing to do is to just keep your portfolio long-term and, on the whole, you will do reasonably well.

 

What does market history teach us about the importance of being patient and seeing things from a very long-term perspective?

If you look at shares and bonds and cash over 15 or 20 years, it hardly ever happens that shares don’t do best out of that because, over the long-term, shares will give you a higher return because you’re taking slightly more risk in the short-term volatility sense. The share price can go up and down, if you have to sell on a particular day. You might not make as much money as you expected but, in the long run, you will do very well with shares because, on the whole, they earn a higher return. So, if you’re looking at 15 or 20 years — or even, for your pension, it might be 40 or 50 years — then shares should be a part of your portfolio.

 

You mentioned behavioural biases, and how they go back generations – what is it about human beings that makes it so difficult for us to think of investing over forty or fifty years?

I think people find it more difficult now than they used to. In the old days, people used to have no pensions. So they saved. And you see what happened — if you look at their portfolios — they, as they had more money, added shares to their portfolio. And then, as they retired and had to live off it, they would start selling down. But they had no intention of selling in the short-term, because they needed that money for the long-term.

The problem we’ve got now is that a lot of people are using shares as a speculative asset, because they’ve got pensions, they’ve got the security of a salary, which you didn’t necessarily have in the old days. So they’re using shares for speculation in the short term. By doing that, you’re not going to get the steady returns you’d get if you invest for the long term.

 

What about diversification? Looking back through history, there are countries that go through terrible events. But generally speaking, if you’re globally diversified, you’re OK. Is that accurate?

Yes, because there was a period when markets were segmented. But nowadays, you can buy shares all over the world. So, what you should do is say: “OK, the world economy is probably going to do OK, and I’ll think about spreading my risk across countries. You might want to start thinking about climate change, and thinking about how we’re going to deal with that; and it probably means that there’ll be new industries that we haven’t even thought of that will be invented to deal with climate change. So, if we stick with the markets as a whole, we should be all right.

 

What other advice would you give to investors from a market historian’s perspective?

My advice would be to spread your risks when you’re buying in, because if, for example, you inherit some money and you have a big lump sum, don’t put it all into the market on the same day. Do what’s called dollar averaging, or pound averaging, where you spread your risk over a few months so that you get an average price when you invest, rather than the price on one particular day. Because on one particular day, anything can happen.

 

A quote from Janette Rutterford about investor behaviour, taken from the interview

 

So there you have it. The three most important takeaways are:

– it’s almost impossible to predict whether markets will rise or fall;

– long-term investors can simply sit out market volatility; and

– it’s best to be globally diversified.

 

Thanks to Janette for her time and expertise. If you’re interested, you can access the Open University’s Managing My Investments course for free.

 

Image: AbsolutVision via Unsplash

 

 

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