Looking in the wrong places for returns: Four common mistakes

For investors who want to avoid reacting to the “noise” by trying quick fixes which are likely to damage portfolio returns, here are four common mistakes to avoid.

1. Ignore the ups and downs of markets

Don’t forget, it’s about “time in” rather than “timing” the market. Selling falling stocks out of fear will just lock-in losses, especially if the quality of a company remains sound. We seldom see a bad time to buy or own a great business.

It has become more urgent than ever to heed this call, with dynamics such as low economic growth and technological disruption contributing to a divergence between so-called ‘winners’ and ‘losers’ that further distorts the potential longer-term value of these same companies.

2. Don’t wait for markets to fall from all-time highs

Many apparent highs tend to be followed by a newer high. As a result, investors risk missing out on significant further gains if they see an all-time high as a signal to sell a position.

It’s also impossible to know when a pullback might come, how strong it will be, or how long it will last. In fact, the market might have already risen again (and moved even higher again) while a fearful investor is waiting to buy back in.

3. Don’t assume high valuations are bad or that low valuations will lead to good performance

Market valuations get too much attention among investors, especially since valuations are mean reverting. It is fundamentals, such as earnings growth, that dictate returns in the long run.

4. Avoid being influenced by the “sticky inflation” narrative 

While the macro regime remains a hot topic, it appears that pressure is easing. In turn, inflation is becoming less of a focus in earnings calls.

In line with this, more attention should be on real-world fundamentals and sustainable earnings power.

Keeping it simple

Putting market fears and other dynamics aside, the sustainability of a company’s returns and the scale of its reinvestment opportunity over the long term is based on performance. Its quality will stand the test of time, whereas sticking to what’s popular will more likely distort the longer-term outcome.

Such resilience is a must-have when investing in the current volatile environment. It is more common at the moment in companies that offer defensive earnings and cash flow streams.

Ultimately, this reflects the importance of having conviction in great companies with deep moats, while keeping focused on the fact that concentration doesn’t necessarily equal higher risk – especially over the long term. The way forward? An approach that can invest where the best opportunities exist, unconstrained by geography or sector.