A combination of the blanket news coverage of economic worries, the associated information avalanche we are now exposed to and our innate fascination with crises is likely making us worse investors. We’re more fearful, more jittery and more focused on the short-term. With the year drawing to a close, now is a good time to reflect on some key lessons from 2014.

Lesson 1: Turn down the noise

This year has seen an endless list of worries. Ukraine, a property collapse in China, the end of quantitative easing and talk of rate hikes in the US, global deflation, renewed weakness in Europe, geopolitical instability in the Middle East, protests in Hong Kong, Ebola, Australian budget cutbacks, the collapse of the iron ore price, and so on.

Last year was the same with the US fiscal cliff, worries about Italy and Spain and US Federal Reserve tapering. Similarly, 2012 was just as packed with worries… you get the picture. While not to deny the current worry list, it’s really nothing new. The global economy has had plenty of difficult phases in the past. And it got over them.

The reality is that much of this financial news is noise – random moves in economic data due to statistical anomalies rather than a fundamental swing in the economy, shifts in share prices and currencies that reflect swings in sentiment on the day, constant chatter about what it all means. And of course it’s well known that ‘bad news sells’.

Given all this, there are four things investors should remind themselves of:

Lesson 2: Don’t ignore dividends

Up until the 1950s most share investors were long-term investors who bought stocks for their dividend income. This changed in the 1960s as bond yields rose on the back of inflation and investors started to shift focus to capital growth. However, thanks to the volatility seen over the last decade or so, and an increased focus on investment income as baby boomers retire, interest in dividends has been on the rise.

Below are some things to note about dividends:

Dividends provide a great contribution to returns, a degree of protection during bear markets and a great income flow. Investors should always allow for them in their investment decisions.

Lesson 3: Be wary of herd mentality

The Japanese bubble of the late 1980s, US tech stocks in the late 1990s, US housing and dodgy credit in the mid-2000s all had one thing in common – investors had jumped on a bandwagon in a euphoric mass. This resulted in some assets becoming over-loved and overvalued and ripe for a crash that, of course, happened.

The trouble with herd mentality from an investment perspective is sourced in investor psychology. It is well known that individuals suffer from lapses of logic. For example, they tend to:


And of course these lapses are reinforced and magnified when many investors start thinking the same way. The mini pullbacks in share prices seen early in 2014, and then more recently provide classic examples of what can happen when the crowd gets a bit too optimistic. This then sets shares up for a pullback, relieving the optimism. However, we haven’t yet seen the sort of euphoria that is usually seen at major market tops. The key implication for investors is that, while it may feel uncomfortable, successful investing often requires going against the crowd – particularly when the crowd is at extremes of bullishness and bearishness. Various investor sentiment and positioning surveys provide a guide.

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

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