Past imperfect, future uncertain

Optimize investment decisions by focusing on current information, not past outcomes, to achieve future financial goals effectively.

We are creatures of habit. So, we typically look at outcomes of our past investment decisions to make investment choices today that will help us achieve life goals in the future. Here, we discuss why taking current investment decisions based on past experiences may not be optimal.

Investment outcomes are uncertain. A good decision can lead to a bad outcome and bad decision can lead to a good outcome. You may argue that outcome is all that matters. After all, if you are investing to accumulate wealth to buy a house, the success of your decision depends on whether you buy the house or not.

If a decision in the past turned out to be a good outcome, you may be tempted to make the same choice now. That may not lead to the same outcome in the future. Take gold. Suppose you invested in sovereign gold bond (SGB) in 2023 because you believed gold is always a good investment. Sure, your investment would have gained significantly. There are two factors to consider, though.

One, what if gold price declines the week before maturity of the SGBs? This is important because redemption value is based on the average price of gold on the last three days before the maturity date. Your investments would have gained but did you even consider investment in gold ETF? And two, did you consider the (political) factors that led to gold prices moving up recently? What if some other commodity catches the market’s fancy in the future? It would be, perhaps, optimal if you consider these factors before deciding to continue investing in gold based on returns experience.

The past decisions may not always work in the future for reasons such as change in income-tax regulations, continually changing market dynamics and political situation. So, do not feel compelled to take the same decisions today that resulted in positive outcomes in the past. Also, do not assume a decision that did not work in the past will not work in the future. It is tempting to attribute positive outcomes to skill and negative outcomes to bad luck. Yet, it will be optimal to take investment decisions based on the information currently available and not on past outcomes. Be mindful that both skill and luck are important for investment success.

(The author offers training programmes for individuals to manage their personal investments)