Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 482

Fighting the last war

In November 1918, France was physically and mentally scarred. World War One was ending, yet the victory had come at an enormous cost. Of the 8 million Frenchmen mobilized, more than a million had died and another million were crippled. Eastern France had been almost continuously occupied by enemy forces for four years. Consequently, the country’s most advanced agricultural and industrial areas were devastated.

A big question emerged after the war: how could France best defend itself against future attack? The question took on greater urgency after the signing of the Treaty of Versailles in 1919. The treaty punished and crippled the war’s aggressor, Germany, yet France believed that the Germans had gotten off lightly and war would resume soon enough.

A safe France

After a decade-long debate, a key pillar of French defence against future attack was decided. It became known as The Maginot Line. The idea came from fortifications around Verdun which had worked well during World War One. They had held up to extensive artillery fire and suffered minimal damage.

The Maginot Line would be an extended series of large-scale buildings along the south-eastern French border. It would defend the region most vulnerable to attack. With the south-east fortified, France could focus on gathering forces in the north-east of the country, to get ready to enter, and fight in, neighbouring Belgium. Belgium was a key ally of France in 1930, when the building of the Maginot Line commenced.

Not as safe as assumed

France largely completed construction of the Maginot Line (pictured below) by 1936 and the country felt safe. After all, what worked in World War One had been extended and would shield the country from future attacks.

There was one problem: Germany didn’t end up attacking France via the Maginot Line. In 1940, it attacked the Netherlands, then moved through Belgium, to enter France. Germany met little resistance and France was subjected to a quick and embarrassing conquest.

After World War Two, the Maginot Line came under severe criticism both in France and abroad. In hindsight, it’s easy to pick flaws with the idea. At the time though, France thought it was learning from the recent past and applying that knowledge to the future.

Recency bias

Investors often make the same mistake that undid France. Behavioural economists call it recency or extrapolation bias. It’s a cognitive bias, or mental mistake, where investors incorrectly believe that recent events will happen again soon. Put another way, investors often overweight new events or information without looking into the objective probabilities of those events occurring in the long run.

Think of last year’s bubble price action in the likes of Bitcoin and GameStop, and how investors (or more aptly, speculators) thought the huge increases in prices for these things would continue without looking objectively at the long-term fundamentals.

To avoid the fate of France and indeed Bitcoin and GameStop speculators, it’s worth looking at recent events which investors may need to be careful extrapolating or overweighting into the future. They include:

  • Rising interest rates though everyone expects them to remain relatively low.
  • A pullback in bond prices making them attractive versus recent history.
  • The traditional 60:40 equities/bond portfolio failing miserably this year, with calls for it to be adjusted or discarded.
  • The US$ becoming ‘king dollar’ and the pound, Euro and Yen getting pulverised.
  • Growth stocks coming back and being set for further outperformance given their superior performance since 2008.
  • Most Australian superannuation funds having outperformed their benchmarks, with expectations of more to come.
  • Venture capital and private equity continuing their ascent in the finance industry.
  • Significant government debt having not been an issue (until very recently).
  • Gold being one of the few assets to have performed well in A$ terms this year, with predictions of further outperformance going forward.
  • Volatility being back. Period.

Building a durable portfolio

How can investors reduce the likelihood of them applying recency bias to their portfolios? Perhaps it’s moving in the opposing direction? Instead of overweighting recent events; underweighting them. Instead of investing in what’s worked for the past decade; investing in what hasn’t worked.

For example, since investing in growth stocks has worked since 2008, one should take the opposite tack and invest in value stocks. The trend in growth to value has ebbed and flowed throughout history and value could make a comeback.

The problem with this contrarian approach is that though many things in markets do mean revert, they often take longer than investors think. Or they may never mean revert, as a new event may prove enduring rather than fleeting.

Instead, the best strategy for investors may be a more balanced one: to be aware of mental biases such as recency bias and build a portfolio which is neither overweight nor underweight recent events. In other words, constructing a durable portfolio of investments which will perform under most, if not all, future circumstances.

 

James Gruber is an Assistant Editor at Firstlinks and Morningstar.

 

  •   2 November 2022
  • 1
  •      
  •   
1 Comments
R S Gupta
November 08, 2022

Very good way to invest in durable portfolio

 

Leave a Comment:

RELATED ARTICLES

Investing is like water, but what the hell is water?

10 cognitive biases that can lead to investment mistakes (Part 2)

10 cognitive biases that can lead to investment mistakes (part 1)

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

Latest Updates

Exchange traded products

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Taxation

Will investors be better or worse off under new housing tax changes?

Housing tax reforms have sparked warnings of market turmoil and promises of greater fairness. But after modelling nearly two decades of property data, the results suggest winners and losers may not be who many investors expect.

Retirement

Three considerations before reshaping your legacy plan

Many retirees hope to leave a legacy. Proposed trust tax reforms could force families to rethink. The question is not how much to leave behind, but whether today's inheritance plans will still make sense as circumstances change.

Investment strategies

Why experienced investors still get markets wrong

Retirement is approaching. Markets are noisy. And every headline seems to demand action. The biggest investment risk isn't fear, greed or market volatility, it often arrives disguised as research and sensible risk management.

Shares

Why pay more for less?

Conditions were stacked in favour of professional investors in 2026. Most still fell short, raising questions about where investors should look for value. Meanwhile, an alternative strategy continued to make its case.

Investment strategies

Bleeding air out of the bubble

Equity valuations have fallen sharply over the past year, yet investors have largely been spared the volatility and losses that typically accompany a de-rating. What explains this unusually orderly reset? Here are five key drivers.

Strategy

Has AI gone rogue?

We worry about AI becoming conscious. But what if consciousness isn't the issue? The more unsettling possibility is a machine capable of pursuing objectives relentlessly, without motives, emotions, or awareness of any kind.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.