Those who be­have, save

Knee-jerk re­ac­tions have a detri­men­tal, long-term ef­fect on re­tire­ment sav­ings

Financial Mail - Investors Monthly - - Feature: Retirement - Jo­hann Barnard.

nvestor 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

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

Ire­search 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. “Roboad­vice 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.”

We al­ways try to con­struct port­fo­lios that are ro­bust, and deliver con­sis­tent re­turns over the long term

David Crosoer … short-term view

Hugo Mal­herbe … habit of sav­ing

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