Those who behave, save
Knee-jerk reactions have a detrimental, long-term effect on retirement savings
Investor behaviour, or misbehaviour, is a topic on which numerous books have been written; probably without much success in discerning what drives sometimes incomprehensible decisions, writes Johann Barnard
Buy low, sell high is as simple a mantra as one could imagine, except the evidence often points to the exact opposite happening.
These knee-jerk reactions often have detrimental, long-term effects on investors’ retirement savings portfolios.
"People react to certain events after they’ve happened rather than planning for them," says Richard Carter of Allan Gray. "So we’ve seen people wanting to take their money overseas after the rand has crashed and there are endless examples of people reacting after, rather than preparing for what might happen.
"That is the fundamental investor behaviour conundrum that in aggregate you can’t fix. But an individual can say I’m not going to invest according to the noise and follow the trend, I’m going to do my planning, make my decisions and stick to them.
"If investors do that, they’ll get a better outcome in the long term. That investor behaviour you see over every time period — it’s just the way we behave."
This is incredibly frustrating for money managers tasked with protecting investors’ wellbeing. The problem is worsened by the availability of tools and platforms that allow investors to take charge of their own affairs, or lead them to making bad decisions based on short-term trends.
This is a problem that managers at PPS Investments have, despite being a mutual financial services provider catering exclusively to graduate professionals.
David Crosoer, executive for research and investments, says modern lifestyles and attitudes have contributed to an increasingly short-term view by investors. "The holding period for equities has decreased significantly over the past 10-20 years, where the average time an investor holds an equity now is down to a few months," he says. "For a mutual this creates opportunities for us to find active managers willing to take a long-term view and take advantage of any mispricing that short-termism might lead to."
PPS has tried to counter an innate tendency to chop and change between different funds or asset managers by adopting a multimanager approach that caters to differing needs and priorities.
"We always try to construct portfolios that are robust, and deliver consistent returns over the long term," Crosoer says. "We try to get our members to stick with their process and not chase performance by jumping around from one manager to another. Where they choose to select their own funds we try to encourage them to stick with their manager and not chase the best-performing asset class.
"The most sobering statistic that I read, which I think is based on US statistics, is that the average investor tends to do worse than the worst fund in the industry when they keep changing to funds that did the best the previous year."
This is a phenomenon that could only be expected to increase with the rise of technology-driven solutions such as robo-advising.
PPS executive for product development, Hugo Malherbe, says the case for financial services providers is clear in that this type of online service is an easy way to attract new customers. "Robo-
advice is still limited and tends to be a set list of questions that delivers stock-standard answers, with a lot of disclosures at the bottom. It allows companies to access a large number of clients with a low-cost servicing model.
"We value personal advice, but we do see the benefit of robo-advice as the ability to provide advice to young investors, who do not have complex investment decisions, and just need a nudge in the right direction. For young investors the immediate need is simply getting into the habit of saving and starting to take advantage of the benefits of compound growth when saving towards retirement."
And developing that discipline is probably one of the most important aspects of building a retirement portfolio.
Another aspect of investor behaviour that destroys value, argues Mark Lindhiem of Investment Solutions, is the tendency to buy what is in favour and sell what is out of favour.
"When markets go up and things look rosy, investors are encouraged to invest. That is often the worst time because markets are expensive so there is more risk. When markets have crashed, investors can often find the best opportunities because good-quality assets are cheap.
"The message to investors is to understand the advice and have rules and processes in place to protect you from your natural behavioural tendencies that may compromise your investment strategy."