Markets need no emotions
EMOTIONS GET IN THE WAY OF RATIONAL INVESTMENT DECISIONS Arguably the best time to put money into the market is when it’s fallen in value. If you’ve already been in the market you need to ride it out.
Offshore investors are concerned offshore markets are expensive. For value managers, countries such as India and the US have very high PE ratios. A related concern apparent among global fund managers, is if the global market is headed for a correction.
As independent financial advisors we diversify our client’s exposure across a number of managers with different investment approaches to try 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.
At the recent 2017 BCI Global Investment Conference, Hywel George, Old Mutual Group director of investments, said he could make a bull market case or a bear market case for global equities depending on how you look at it.
Despite the low GDP experienced in SA 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 financial advisors be able to assist clients in not making the common mistakes that lose investors’ money?
As humans we’re wired to maximise pleasure and minimise pain. When you apply this to a market cycle you get the roller coaster of investor emotion.
Arguably the best time to put money into the market is when it’s fallen in value. If you’ve already been in the market you simply need to ride it out. A famous Warren Buffet quote goes: “investing is simple but it’s not easy”. He’s 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.
It’s 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: ‘the behaviour gap’.
An investor’s last line of defence 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, as we can inadvertently disadvantage clients by making changes to their portfolio.
One can only hope the local market starts to see a recovery in the near future while global markets continue to rally and managers look to find new opportunity in depressed markets such as emerging markets.
Jesse Morgans is with Asset Protection International.