Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 607

The two most dangerous words in investing

For anyone interested in investor behaviour, extremes matter. When there is a severe dislocation between the value of an asset and its fundamental characteristics, or spells of dramatic price performance, it suggests that some of the most powerful aspects of group psychology are taking hold. Such situations create both significant risks and opportunities. The problem is that identifying extremes is much harder than it seems. There are, however, a couple of words than can help – ‘always’ and ‘never’.

Market extremes are obvious, but unfortunately only obvious after the event. Once the extreme has been extinguished, we can happily carry out a post-mortem on the irrationality that led to it, typically ignoring the fact that for the extreme to have existed many people must have considered it to be justified at the time.

And, of course, this must be the case. For market extremes to be reached there has to be a belief that the levels of exuberance or dismay surrounding a particular asset class is simply a sensible response to a changing world. The performance and persuasive narratives that accompany financial market extremes are taken not as the cause of it, but as evidence for its validity.

This creates a problem for investors. Periods of extremes are critical and come with major behavioural risks, but we struggle to identify or acknowledge them in the moment. What can we do about it?

As usual, there is a heuristic that can help. Perhaps the most reliable indicator that sections of financial markets are exhibiting extremes in sentiment or valuation is when investors start to use the words ‘always’ and ‘never’. The more we hear these uttered, the more we should pay attention.

The problem with the words ‘always’ and ‘never’ in an investing context is that they suggest a certainty that simply does not exist in the complex and chaotic world of financial markets.

Whenever we fall into the trap of saying something ‘always’ or ‘never’ happens, we can be sure that a performance pattern has persisted for so long that we have become unable to see anything else in the future: “The US will always outperform”, “yields will never rise” etc…

‘Always’ and ‘never’ are reflections of two ingrained and influential investor behaviours – extrapolation and overconfidence. Prolonged trends often become perceived as inevitabilities.

At the point we have decided that nothing different can occur, valuations have undoubtedly already adjusted to erroneously reflect a level of certainty in inherently uncertain things.

Thinking in terms of ‘always’ and ‘never’ has profound consequences for investors, particularly in terms of how we build portfolios. The more certain we are about the future and the more confident we are in the prospects for a particular security or asset class, the less-well diversified we will be. Portfolios built on the idea that things ‘always’ happen or will ‘never’ happen are probably carrying too much risk. Market extremes inescapably encourage dangerous levels of concentration and hubris.

Of course, there are things in financial markets that we can be more sure of than others. Saying that technology stocks ‘always’ outperform is very different to claiming that equity markets ‘always’ produce positive returns over the long run. Neither of these statements are true, but one is inherently more problematic than the other.

What investors really need to be wary of is situations where there is an evident gap between the level of certainty we can possibly have in how the future will unfold, and the certainty with which we talk about it. When that gap is wide it ‘always’ ends badly.

 

Joe Wiggins is Director of Research at UK wealth manager, St James’s Place and publisher of investment insights through a behavioural science lens at www.behaviouralinvestment.com. His book The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions.

This article was originally published on Joe’s website, Behavioural Investment, and is reproduced with permission.

 

  •   16 April 2025
  • 4
  •      
  •   

RELATED ARTICLES

Invest like you are bad at making predictions

Being human means being a bad investor

The problem with concentrated funds

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.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

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.

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.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

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.