Adriaan Pask | Chief Investment Officer | PSG Wealth | mail me |
Investors should use mental models to find stillness in the midst of volatility. With gold reaching all-time highs and the JSE All-Share Index posting major gains, global markets remain full of activity.
US fiscal concerns and ongoing geopolitical tensions add even more uncertainty. At present, there is rarely a dull moment for markets. However, this constant volatility generates mental noise. It can cloud investor judgment when analysing markets or interpreting short-term equity returns. In such situations, having a mental model to categorise long-term risks in an investment portfolio becomes essential. Mental models help investors maintain focus and perspective during unpredictable market shifts.
The US labour example
Current debates around US labour statistics offer a useful example that demonstrates the power of a long-term mindset. Labour statistics serve as a key economic indicator because they reflect potential consumer spending trends. If job creation slows or a recession emerges, spending tends to decline, creating broader economic challenges.
Within this single topic, there is an overwhelming amount of commentary. Analysts discuss the Bureau of Labour Statistics, political influences, new job numbers, vacancies, productivity, and the rise of Artificial Intelligence replacing or creating jobs, all at the same time.
While each of these data points deserves analysis, investors must ask how relevant they are to long-term goals. Some short-term developments may matter for the broader economy, but not necessarily for long-term investors. Recognising that distinction is critical.
This is where a mental framework or model becomes valuable. It allows investors to group topics into categories that distinguish between short-term noise and long-term drivers. By clarifying what matters most, mental models filter distractions and support more disciplined decision-making.
Mental models and how to apply them
Short-term factors can affect investments, such as interest rates or money market returns. However, the forces that drive equities often differ. Therefore, investors should match the right concern with the right asset class and evaluate it in the proper context. In reality, only a few key drivers influence each asset class over the appropriate time horizon.
Extending the US labour example helps illustrate this point. Many investors are now asking whether slowing US job growth signals an upcoming recession. It is an important question when assessing the direction of the economy. However, when one considers that investors typically hold equities for decades, the perspective shifts significantly.
Recessions usually occur every five to seven years and should be expected as part of the normal economic cycle. Over time, their impact on long-term equity performance is minimal. For instance, neither the recession after the global financial crisis nor the one following COVID-19 had lasting effects on global equity returns.
The real danger lies not in the recession itself but in how investors react to it. Many move into cash out of fear that a recession is coming, only for that recession never to occur.
When markets recover and post gains, those same investors are left on the sidelines, realising they have made a costly mistake. During such uncertain times, mental models provide the structure needed to remain steady. They help investors avoid emotional decisions that undermine long-term objectives.
Understanding what drives long-term returns
Consumer spending levels play a crucial role in shaping equity returns over the long term. When consumers spend more, companies grow their earnings and equity prices rise over time.
Many investors monitor consumer data monthly, but the short-term fluctuations usually have little impact. It is important not to mistake short-term data shifts for long-term trends.
What truly matters is whether significant headwinds exist that could restrict consumer spending in the future. Temporary cycles or minor variations in behaviour are normal and should be expected. However, deeper structural issues that suppress spending can undermine the foundation of long-term equity growth.
With so much information and movement in global markets, investors must separate what truly matters from what only appears important in the short term. By relying on mental models, they can maintain clarity, focus on enduring drivers of value and make better long-term decisions.
