Don’t be emotional about the markets

The need to maximise pleasure and minimise pain is the main cause of investors not achieving the returns available from markets.

The worry on the minds of offshore investors is the concern that offshore markets are expensive. For value managers, countries such as India and the US have very high PE ratios.

A related concern that is apparent among global fund managers is whether or not the global market is headed for a correction. The general feel among the managers is divided between a bear market case and a bull market case going forward.

As independent financial advisors we diversify our client’s exposure across a number of managers with different investment approaches, in an attempt to expose them to different views and hopefully give them a smoother investment experience over the long term.

Another worrying aspect of global markets is the fact that global bonds are expensive, as illustrated in the chart below from Orbis, which shows that they have historically been cheaper 96% of the time.



At the recent 2017 BCI Global Investment Conference, Hywel George, director of investments at the Old Mutual Group, said that he could make a bull market case or a bear market case for global equities depending on how you look it. The slide below was used to motivate his case for a potential bull market:



Despite the low GDP experienced in South Africa of late, world growth is steady and global monetary policy appears to be very expansionary.

But, if global markets were to have a correction, how would we as financial advisors be able to assist our clients in not making the common mistakes that lose investors’ money?



As humans we are wired to maximise pleasure and minimise pain. When you apply this to a market cycle, you get the roller coaster of investor emotion as represented above.

Arguably the best time to put money into the market is when it has fallen in value. If you have already been in the market you simply need to ride it out. One of the famous Warren Buffet quotes is “investing is simple but it’s not easy”. He is referring to the fact that emotions get in the way of rational investment decisions. This behaviour is the main cause of investors not achieving the returns available from markets.

The following graph shows investments into and out of the Allan Gray Stable Fund relative to its performance.



The chart clearly shows that investment flows into and out of the fund are closely matched to the performance of the fund.


It is a clear indication of investors chasing returns rather than riding out the cycles and results in the difference between the performance of the investment and the actual return that the investor experiences – called ‘the behaviour gap’.



The above slide shows the impact of the financial crisis in the equity market. The light blue line indicates an investor who stayed invested and rode the cycle out. The dark blue line is an example of an investor who removed their money from the market at the bottom of the correction, invested it in cash and only reinvested the money a year later. The green line indicates an investor who fled to cash and never re-entered the market. This is a clear indication of the behaviour gap and the way that we are wired to maximise pleasure and minimise pain.

The last line of defence that an investor has is their financial advisor who must become a behavioural coach when markets become volatile. As financial advisors who have been under pressure lately, from clients wanting returns in a flat local market while the rand strengthens and thus reduces a lot of the returns from offshore exposure, we need to remind ourselves to stick to our investment decisions and not to chase investment returns whilst under pressure from clients, as we can inadvertently disadvantage them by making changes to their portfolio.

One can only hope that the local market starts to see a recovery in the near future while the global market continues to rally and managers look for new opportunities in depressed markets, such as emerging markets. Advisors must be cognizant of Warren Buffet’s advice: “Only when you combine sound intellect with emotional discipline do you get rational behaviour.”

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Jesse Morgans

Asset Protection International


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