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 Travel ban – how to claim for the loss incurred

As with the recent Covid-19 pandemic, governments sometimes issue travel bans to prevent people from travelling to other countries. This becomes even more complicated if you’ve already planned and paid for your trip. Your flights will be cancelled, and you may lose money from cancelled accommodation arrangements. How do you claim for the financial losses incurred due to a travel ban?

How to finance and insure a second-hand vehicle

Buying a second-hand vehicle may suit your budget better than acquiring a new one. But what impact does an older model have on vehicle finance and car insurance? We reached out to specialists in the field to explain what the financial implications are of pursuing a second-hand vehicle.

Reading your loan agreement: look out for this

Many people don’t read their loan agreements. They just sign on the dotted line without realising that they could be signing their lives away. But it’s important to review your loan agreement before and after taking your loan to avoid future setbacks.

 

Part 1: The difference between good and bad debt

In the first part of our Debt-ucate series we explore the difference between good and bad debt and why debt is, in fact, necessary.

Deals

Udemy online course for R180

Price: R180
When: Until 27 March 2020
Where: Online

Educate your kids for free with Skills Share

Price: Free
When: Daily
Where: Online

Take advantage of payment holidays from Standard Bank and Nedbank

Price: Free
When: From 1 April to 30 June 2020
Where: Nationwide