Financial markets are enjoying an exceptionally strong finish to 2023. At the time of writing, equities in the US were up over 10% and aggregate bonds 5%. Balanced investors have experienced a very healthy annual return in under three months. Although it is pleasing to close the year with portfolios increasing in value; it is perhaps more useful to think about what such periods tell us about the oddities of financial markets and our own behaviour:

– Predicting the short-term fluctuations of markets is incredibly difficult to do well and enormously damaging when done badly. It’s best to avoid it. 

– Although it might make us feel good right now, the high returns of this quarter means that long-term, regular savers will be investing at more expensive valuations and lower yields.

– Financial assets behave a little like a Veblen good – demand for them tends to increase as the ‘price’ increases. Or, to put it another way, as expected returns fall, demand rises.

– The movement in asset prices over the fourth quarter of 2023 has little to do with the valuation of long-term cash flows but a lot to do with momentum.

– Most investors (certainly those making shorter horizon decisions) are simply engaged in a circle game of predicting how other people like them will react to certain market / economic developments. (If the Fed do X, other investors will do Y, so I will do Y, and so it continues).

– Price performance creates market narratives, not the other way around. Most stories are a persuasive post-hoc rationalisation of events. Financial market movements are typically a mystery before the fact and obvious after.  

– When we enjoy periods of strong performance, we should apply a mirror and ask how we would feel if we were experiencing losses of similar magnitude.  

– Periods of extreme are dangerous for investors in both directions – they create unduly ebullient or pessimistic expectations and lure us into irrational extrapolations. Bad decisions get made at extremes.

– What has happened recently carries far more weight in our thinking than it really should.

– The fear of missing out (markets up) or the fear of being involved (markets down) are most acute during periods of abnormally positive or weak performance.

– Short run equity returns are volatile and unpredictable. If they weren’t, their long-run returns would be much lower.

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Investors should try to treat periods of unusual performance with equanimity. Over the long-run they are unlikely to matter that much; unless, of course, they lure us into poor decisions.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).