Turmoil in Financial Markets: decision-making bias in financial trades

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silmcoach
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Re: Turmoil in Financial Markets: no tariffs Sunday

Post by silmcoach »

A fresh wave of US tariffs on Chinese imports due to take effect on Sunday has been cancelled for now.
US negotiators are reportedly offering to significantly reduce existing tariffs on about $360bn (£270bn) worth of Chinese imports. In return, China has promised to buy large quantities of US soybeans, poultry and other agricultural products.

"We will begin negotiations on the phase two deal immediately, rather than waiting until after the 2020 Election," US President Donald Trump said in a tweet. "This is an amazing deal for all."


Trump halts new tariffs in US China trade war, BBC News, accessed 14 Dec 2019, https://www.bbc.co.uk/news/business-50784554
Interesting that the US markets response was luke warm to this announcement. I think the positive news was priced in a couple of days ago. I'm wondering if there might be a bit of an anti-climax now and the markets drift down to year-end. The same might apply to UK markets as the euphoria dies down and future trade deals become the focus of attention.
silmcoach
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silmcoach
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Re: Turmoil in Financial Markets: Happy New Year

Post by silmcoach »

Well, how wrong can you be? Rather than fall, all the indices rose to record highs up to Xmas. They have gone into decline post-holidays though.

I did not expect a significant "Boris bounce". Sold too soon, missed out on the 3.5% or so gain due to my aversion to loss. Still, happy to have banked (sold stock for cash) my 10% gain for 2019 on top of the 25% contribution from the government.

So, when do I buy back in to get those dividends paying again? Think will start with bonds. Royal London's price usually drops immediately after the ex-dividend date, that's 1st Jan this times around. If the price is right I will add to my current holding (the only one I did not sell any of at November's peak).

As to my suggestion that China would not sign up to a US-China trade deal after saying they would (so as to influence the markets and harm Trump's chances of re-election), it would seem I got that wrong too. Apparently they are going to sign up to Stage 1 of the deal in January, yet at the same time the Chinese Ambassador to the US was warning of a new Cold War between US and China.

It's going to be an interesting New Year! Best wishes to all.
silmcoach
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silmcoach
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Re: Turmoil in Financial Markets: taking stock

Post by silmcoach »

As I follow the markets for now with interest it is time to reflect on my thinking about the stock markets and this experiment concerning loss aversion.

I started as an "experimenter" testing Kahneman's theory that humans are innately averse to loss. I stayed true to this hypothesis, strictly selling losers and holding on to winners, the counter strategy he suggests to avoid falling victim to loss aversion bias. I was okay up until late November, when I began to feel anxious about the lack of any US-China trade deal, and the fact that at the end of 2018 the markets had lost about 25% across the board because of the dispute. It was at that time I bought into several funds, some of which have gained that 25% over the year.

Throughout the year the markets were fairly volatile with significant troughs and peaks. The Dow rose and fell but ended the year up a record 26%. My FTSE tracker rose 19% and my Global funds on average rose as well. Had I stuck to Kahneman's strategy and not sold a majority stake in all but one of my funds (a bond one) I would have increased my investment gain of £376.92 by another +£48.80 +2.2% (on an average investment of around £3K over the year; excluding government bonus contribution of £720). I can't really complain about that. But the thing is, that is me from an "investor's perspective" talking, not the objective experimenter I started out as.

Now the question is, does this switch in perspective invalidate the experiment? Does my switch from an objective strategy to subjective intervention ruin the aversion-to-loss bias experiment? I think the answer comes down to perspectives again. If you take another objective step back and consider the investor from the objective experimenter's position, then the human aversion to loss is "proved" yet again. The experimenter, who due to limited personal funds was taking a significant personal financial risk, could not remain objective.

Perhaps this is an insight into why markets are moved more by sentiment rather than economic fundamentals. There appears to be no correlation between the economy and market indices, certainly not in 2019. So now I'm wondering if the effects of tariffs on China's economy in 2019 will begin to kick in through the Spring of 2020, regardless of whether a trade deal is signed or not.

Kahneman proposed a logical rule that should be followed regardless, hold on to winners, but sentiment, driven by unconscious fear and intuition over-rode that and appears to be doing it again. I'll hold on to my cash for the moment. Guess I fail miserably as an experimenter, but maybe a little more successfully as a prudent investor! My excuse is age. At 71 there may not be time for any significant collapse in the markets to recover in my lifetime. Guess I'll just enjoy my days out, there's far more to life now than worrying about money.
silmcoach
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silmcoach
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Re: Turmoil in Financial Markets: Boom!

Post by silmcoach »

Forget the US-China trade deal - pales into insignificance as Trump lobs in a hand grenade! Don't think there will be any winners.
silmcoach
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silmcoach
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Re: Turmoil in Financial Markets: it's a gamble

Post by silmcoach »

Just placed a £500 bond fund order. The price always falls just after the ex-dividend date. Yield is best available with lowest charges. Need to generate some income but still not a good time to buy back in for stock funds.

Racking my brain to try and understand why the markets are holding up with all that's going on in the world. I've come to the conclusion that investors are just getting used to and accepting risk far more than they could a year ago. The fact is that there is still no where else to invest cash to get decent return, so investors are willing to gamble (and that's what's going on at the moment) for fear of losing out. That fear is over-riding the aversion to loss. Given that the US indices rose over 25% last year, the thought of losing out on the possibility of a similar rise this year is just too much to bear. The thinking is - "I've got no choice ". It's going to take a real shock to shift that thinking. Guess it comes down to the signing of that US-China trade agreement. The question is whether the US flexing it's muscles will cause China to have second thoughts.
silmcoach
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silmcoach
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Re: Turmoil in Financial Markets: the outlook for 2020

Post by silmcoach »

Steve Clayton, a fund manager with Hargreaves Lansdowne (HL) is upbeat about the markets for the coming year. He cites improving global trading conditions, greater political clarity at home [UK, Brexit], and an expectation that cheap money will likely remain on the table throughout the year as positive drivers.

Looking ahead, he suggests things look promising and is dismissive of negative outlooks. He acknowledges high debt levels, but argues low interest rates make these easily serviced, and with low unemployment and a greater willingness of employers to hire, he is far more optimistic. Further, with the likely deescalation of trade wars, he believes weakness in the Chinese economy could well reverse.

Clayton believes low interest rates and bonds yields will push money into stock markets around the world. That said, he then explains why investors should invest their money in HL Growth Funds, so I'm afraid I have to take his forecast with a pinch of salt. But we shall see. I'm inclined to take the World Bank's outlook for the economy with a little less salt. Andrew Walker, BBC World Service economics correspondent, summarises it thus, "The overall picture is one of a global outlook that is overcast and highly uncertain". World Bank warns on global growth, BBC News, Business, accessed 11 January 2020 https://www.bbc.co.uk/news/business-51041356

I will remain cautious before investing in any funds for the time being.
silmcoach
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silmcoach
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Re: Turmoil in Financial Markets: so wrong!

Post by silmcoach »

Well, I couldn't have been more wrong. Market indices continue to rise around the globe :o

China did sign the US-China trade agreement (phase 1)!

It would seem that my aversion to loss distorted my thinking. I was justifying my decision to sell and take my profit of £378 rather than hold on to winners as advocated by Kahneman (but of course I did get 3 x £720 Government contributions in just over two years - that's been the real win in carrying out this experiment).

Loss aversion got the better of me. At least I have kept an average of £100 in each stock fund (11) so they remained on the board, but sadly I did not keep anything in my two S&P funds. I have also kept a watch list of what I sold and currently I would have gained £82.19 more had I not sold, and I will of course begin to lose some dividends.

But hey, oh, you live and learn. At least I put £500 into the bond fund (my twelth fund) which gained £3.00 the next day. Now, sorry to all you winners, I'm still hoping the market will fall so I can buy those winners back, and hold on to them in future.
silmcoach
Greatest wealth - happy heart, peace of mind :D

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