Guiding consumers since 2009

Don't panic! Keep your cool with investments

By Staff Writer

The response by investors to the current volatility in global stock markets highlights the dangerous tendency for investors to make decisions based on emotion, rather than reason.

Check out our investments section for more advice.

Globally, $487bn moved into money market funds in the first quarter of 2008 compared to the $250bn in the last three months of 2007. The majority of this came out of equity funds. In South Africa, the Association of Collective Investments (ACI) reported at the end of the June 2008 quarter that money-market accounts gained popularity with net quarterly sales of R10.2bn.

"Unfortunately, the decision to move from high equity products to very conservative investments is emotion driven and is not a good strategy for investors, particularly those with a long-term investment horizon," says Megan Butler, head of research at Old Mutual Actuaries and Consultants. "This is due to the fact that when markets recover, cautious investors miss out on the often substantial recoveries in share prices."

She adds that similarly, rocketing share prices not supported by fundamentals are caused by herd mentality, when investors derive comfort from investing with the herd. "Unfortunately, these so called bubbles can have devastating consequences for investors when sanity prevails."

Gary Hartwig, an actuary at Old Mutual Actuaries and Consultants, says a study of behavioural finance shows us investors are often driven by emotion, rather than facts, allowing for irrational behaviour when making investment decisions.

"To illustrate the point, with children in your home, would you consider a swimming pool or gun more dangerous? Just as swimming pool drownings are 100 times more likely than gun-related accidents, the markets are likely to rise more often than fall on any given day," Hartwig says. "Unfortunately, shocking negative events tend to receive far higher volumes of media coverage and stick in people's minds."

"In an investment context, investors should avoid looking at short-term performance to make long-term decisions as they are more likely to see unusual events and may not get a true reflection of the actual performance," Hartwig comments. "For example, judging a particular asset manager over a short-term time period will not necessarily give you an accurate picture of ability over the long term which may lead to serious errors when allocating assets."

"‘Heat-of-the-moment' decisions can have far-reaching negative consequences for investors," says Megan. "Investment decisions are complex and should be thoroughly examined.  I encourage investors to consult an expert in the field who is able to view markets objectively. They will make short-term or tactical calls on exposure to equity markets in order to lock in returns when markets do poorly, and to maximise returns when markets recover."

Investors should be spend time focussing their investment strategy, taking a 20 to 30-year view and not making decisions based on the last 2 or 3 years of performance.  "Investors should not be influenced by the fear of regret, but strip out emotions to provide an objective viewpoint based on common sense," Hartwig concludes.

Recent Articles

Featured The bank took money from my account – is this allowed?

You’ve just deposited money into your account and suddenly you see a notification from your bank. Money has been deducted from your account to pay the outstanding debt that you have with the bank. Is this allowed?

How much does it cost to draft a will?

Having a Will allows you to determine who inherits your property when you die. If you die intestate, the government will determine how to distribute your assets. Many people die intestate because they don’t know how to draft a will or are intimidated by the costs of drafting one.

Is your home correctly priced for the current market?

The property market is typically in either one of two phases, a buyers’ market or a sellers’ market. According to real estate experts, we are currently in a buyer’s market. For this reason, it is important as a seller to correctly price your house to ensure interested buyers and a valuable sale in the end.

Fuel rewards programme – how to fill up on petrol and points

South Africa’s volatile economy has often meant that factors like the fuel price bear the brunt. This year alone the country’s fuel price has fluctuated by between R1.50 to almost R3, which has put increasing pressure on motorists. That said, many of the bigger South African brands have provided some relief by way of fuel rewards programmes.

Deals

Mowana Voucher Special

Price: From R1,099
When: Before 24 December 2019
Where: Johannesburg

Birchwood Hotel Christmas Gift

Price: R959
When: Between 15 December 2019 to 1 January 2020
Where: Johannesburg

Burger & Lobster Lunch in 30 Minutes Special

Price: R99
When: Mondays
Where: Cape Town