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Are you a market timer or an anxious investor?

New behavioural finance research helps hack our mental bad habits for financial success.
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From dumping stock to panic-buying toilet paper, the Covid-19 crisis has provided the perfect example of how fear and greed tend to influence us, and challenge the logic of our decision-making process. While most of us understand the science behind long-term investments, it seems that in the face of a crisis, logic goes out the window and we do things that can negatively impact our journey to financial success.

But luckily recent research shows that it’s not all bad news. I refer to the recent whitepaper Understanding the great forces that rule the world: A study on South African investor behaviour Nixon explains that there are steps we can take to keep control of our financial success by over-riding the detrimental auto-pilot in our brains when volatility strikes.

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Avoid the switch itch, mind the behaviour gap

“Volatility refers to those times when the market is very uncertain and the value of investments tend to go up and down,” explains Nixon. “This can happen when a company scandal breaks, Elon Musk tweets something vague, or – on a bigger scale – when a global pandemic hits.

“During the panic that follows, its human nature to unknowingly give way to cognitive biases – or bad mental habits. In the investment world this usually causes people to switch their investment funds – some change to safer, lower-risk investment funds while other people may take a gamble and switch to higher risk investments with the allure of greater reward,” explains Nixon.

The team at Momentum have called this urge to change investment funds “the switch itch”. Their research shows that it results in an actual cost over time in the form of lower investment returns – knows as a “behaviour gap”, meaning that we actually lose money when we make hasty switching decisions.

The work forms part of a series of studies and research making up Momentum’s Science of Success initiative – a platform where data and insights are brought to life to demonstrate how certain behaviours can accelerate or decelerate our journey to success. By studying how our emotions impact our financial success, this latest research forms a crucial building block to understanding the science of success.

Nixon, along with Professor Evan Gilbert from the University of Stellenbosch’s School of Business and Dirk Louw, an actuarial analyst at Transaction Capital Recoveries, studied the behaviour of 23 000 local investors over time. The result was a detailed understanding of the motivation behind our switching decisions and how this improves or derails our financial success.

The team then used this to develop a set of investor archetypes, explains Nixon. “The archetypes allow us to see which type of investor we are likely to be so that we can identify behavioural triggers and try to quell them before the switch itch kicks in,” says Nixon.

Know your type – Which behaviour investment archetypes are you

The Avoider

  • You like to sit on the side-lines instead of participating in markets
  • The verdict? Your behavioural tax will be low because you aren’t switching often, but you could be missing out on returns that you need because you don’t like risk

The market timer

  • You are very active in terms of watching your fund performance
  • When things are going well – you want to be there. But when they don’t, you want to get out
  • The verdict? You switch a lot and this results in a high behaviour tax – which can damage your savings over time

The assertive investor

  • You like to take risks, stay ahead of the trends and prefer niche, exciting investments
  • The verdict? To satisfy your craving for risk, you tend to switch a lot as new trends emerge. This results in a high behaviour tax – which can eat into your financial success

The anxious investor

  • You don’t like risk, become scared when markets show any sign of turbulence and switch out
  • The verdict? As your fears drive you to switch, you are often in the wrong place at the wrong time and tend to have a high behavioural tax which will erode your investment returns

The contrarian

  • You don’t like to be part of the herd. When others are buying, you sell. When people are selling, you buy
  • The verdict? You are the only archetype to benefit from switching. But, you are in the minority and things can change so you need to ensure that you remain focused on the outcome instead of what others are doing.

According to Nixon, understanding which archetype you relate to will help you to be mindful of your behavioural tendencies so that you can seek the right advice before making snap decisions that could cost you. “In addition to this, following these tried and tested tips will benefit us all, no matter our personality type,” says Nixon.

  1. Get professional financial advice, set goals and develop a plan to achieve these
  2. Have a long-term mindset and don’t worry about timing. Get your wealth to work for you as soon as possible
  3. Diversify and spread your risk
  4. Have a cash windfall for a rainy day to ensure that you are not forced to sell long-term investments
  5. Review your plan often – especially when big life changes happen – and make the necessary tweaks

Adding to Nixon’s sentiment, Head of Marketing at Momentum Charlotte Nsubuga-Mukasa concludes that professional financial advice is vital for South Africans to gain control of their financial success journey. “The Science of Success work demonstrates the importance of research-backed financial advice in helping us to stay the course in terms of our journey to success. By getting fresh financial perspectives from a trained professional, you can avoid making emotion-driven decisions, and remain on track to achieving your financial success,” she concludes.

Paul Nixon – Momentum’s head of technical marketing and behavioural finance.

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And what about doing some “tax Harvesting” towards the end of the financial year and just rebalance a properly constructed portfolio.

And when new investments are made keep to the portfolio balance??

When you are forced to liquidate your pension fund at retirement you are forced to consider all the behaviours mentioned above.

In unusual times, like we have at the moment, re-investing your savings can be a daunting task.

Traditional fundamental analysis has generally become quite useless. The macro is controlled by the behemoth investment houses that apply every trick in the book to front run one another with HST outsmarting algorithms. Their computers are programmed to react to newswires. It is AI on steroids and has been proven to be so powerful that it can crash the largest of exchanges in the blink of an eye.
The central banks have joined forces to take the core of the financial systems where they were never intended to go. Now we have crossed that Rubicon there is evidently no return and there is no Moses to bring forth a new set of rules. The cryptocurrency explosion is a minor symptom.

I like to buy and do not like to sell and will only sell after about 2 years if I see the share is not going anywhere. I lost a lot like that with a share like Steinhoff but gained quite considerably with a lot of shares and now possess so many shares so that if a share dips it does not cause a catastrophe.
Naturally with something like Covid 19 the markets dropped but most of them recovered. And one must watch the markets constantly so that you do not dip out on the 4TH revolution.

End of comments.

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