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

Being human means being a bad investor

The problem with concentrated funds

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Investment strategies

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Property

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Investment strategies

Dumb money triumphant

One sign of today's speculative market froth is that retail investors are winning, and winning big. It bears remarkable similarities to 1929 and 1999, and this story may not have a happy ending either.

Retirement

Can the sequence of investment returns ruin retirement?

Retirement outcomes aren’t just about average returns. The sequence of returns, good or bad, can dramatically shape how long super lasts. Understanding sequencing risk is key to managing longevity risk.

Strategy

How AI is changing search and what it means for Google

The use of generative AI in search is on the rise and has profound implications for search engines like Google, as well as for companies that rely on clicks to make sales.

Survey: Getting to know you, and your thoughts on Firstlinks

We’d love to get to know more about our readers, hear your thoughts on Firstlinks and see how we can make it better for you. Please complete this short survey, and have your say.

Investment strategies

A framework for understanding the AI investment boom

Technological leaps - from air travel to computing - has enriched society but squeezed margins. As AI accelerates, investors must separate progress from profitability to avoid repeating past mistakes.

Economy

The mystery behind modern spending choices

Today’s consumers are walking contradictions - craving simplicity in an age of abundance, privacy in a public world. These tensions tell a bigger story about what people truly value and why.

Sponsors

Alliances

© 2025 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.