PSG Wealth’s Adriaan Pask says that investors should use mental models to find stillness amongst volatility

With gold reaching all-time highs, the JSE All-Share Index making massive gains, US fiscal concerns and continued geopolitics – there doesn’t seem to be a dull moment for markets.

But this perpetual volatility creates mental noise that can cloud our thinking when it comes to markets and interpreting short-term equity returns. In these instances, having a mental model in place to categorise the long-term risk to your investment portfolio is crucial.

The US labour example

Current discussions on US labour statistics provide a useful example to illustrate the power of a long-term mindset. Labour statistics are generally considered a key economic indicator because they offer insight into potential consumer spending trends. If job creation stalls or a recession hits, spending is likely to slow, which can create broader economic challenges.

Within this single topic, there is an overwhelming amount of discussion — the Bureau of Labor Statistics, politics, new job numbers, vacancies, productivity, AI replacing jobs, AI creating new ones — all at once.

While each of these data points can be analysed in great depth, the key question is how relevant they are for a long-term investor. While some short-term developments may be important for the broader economy, they’re not always relevant from a long-term investment perspective — and that distinction is key.

This is where a mental framework or model becomes useful. It provides a way to group different topics into distinct categories that separate short-term factors, which might just be noise, from those that truly matter over the long term.

Mental models and how you approach them

While short-term factors can influence short-term investments, such as interest rates and money market returns, the drivers that impact equities often differ. Therefore, you need to make sure that you tie the right concern to the right asset class and think about it in the right context. Ultimately, there are only a few drivers in each asset class that materially affect the investment outcome over the right time horizon.

Taking the US labour example further helps to illustrate this. Many investors are asking whether stalling US job growth will result in a recession. It is an important question to ask when trying to understand where the economy might be headed. But when one considers that investors are generally encouraged to hold equities for decades, the perspective shifts.

Recessions typically occur every five to seven years and should be expected as part of the normal economic cycle. Over the long run, they tend to have minimal impact on the outcome of an equity investment. Neither the recession following the global financial crisis, nor the post-Covid recession had long-term impacts on global equity performance.

The real risk is not the recession itself; it is how you react in anticipation of a recession, which can be very damaging. Often, investors divest into cash out of fear that a recession is on the way — only for that recession never to materialise. When markets then recover and post gains, those investors are left on the sidelines, realising they’ve made an avoidable and costly mistake.

Knowing what will impact long-term returns

Conversely, consumer spending levels are important for equity investments over the long term. If consumers spend, companies grow their earnings and that drives equity returns over the long term.

While many investors track consumer data month by month, the short-term impact of consumer spending blips is largely immaterial. It is important not to confuse the long-term view with short-term fluctuations.

What truly matters is whether there are significant headwinds that could constrain consumer spending over the long run, rather than temporary cycles or short-term variations in behaviour. Short-term cyclicality should largely be expected. But longer-term structural issues constraining consumer spending can impact the foundation of equity's long-term returns.

With so much happening in markets, investors must separate what truly matters from what may only be important over certain timeframes and less relevant over others.