The COVID-19 pandemic shocked the world and left many scrounging for hand sanitiser and toilet paper as shopping aisles stood empty. Similar havoc was wreaked on financial markets as investors abandoned their long-term goals for the immediate emotional comfort on offer by moving either out of financial markets completely or into comparatively ‘safer’ assets.
It is this kind of kneejerk behaviour that is in dire need of curtailing according to Head of Behavioural Finance at Momentum Investments, Paul Nixon. He believes that this can and should be done with the power of sound financial advice.
“It is well documented that financial advice can prove incredibly valuable,” says Nixon. “A good financial adviser seems to earn far more for their clients than their annual advice fees, so why isn’t everyone queueing for great financial advice?”
Nixon believes there are likely two primary behavioural biases at play that may impact on the decision for investors to use financial advisers. “The first is undoubtedly overconfidence. With all the information we have access to these days, we can easily create the illusion of a more stable and predictable world. It’s all too easy to come across a so-called expert opinion and any view is easily supported by a number of sources online.”
When coupled with selectively attributing positive outcomes to skilful decision-making and poor outcomes to simple bad luck, Nixon says this creates the illusion that investing decisions are much easier than what they are in reality. “People are terrified of losses and being more engaged with our investments gives us a greater sense of control,” he says.
Nixon’s theory comes off the back of the latest Momentum Investments Sci-Fi report, which measured investor behavioural patterns on the Momentum Wealth platform for the 2021 period. It found that the behavioural patterns of South African investors became more palpable in 2021 as a record number of investment switches were processed.
By analysing the behaviour of investors during this period, it was found that active investors (defined as investors performing switch transactions) increased by 80% and the number of switches increased by 50% to a record-high level of 27 994.
“This essentially explains why following our gut instincts when investing often does not always serve us well,” says Nixon. “Clearly, we all struggle to bridge our intentions and our actions. It would be more prudent to acknowledge that we are all simply human and should turn to objective advice when planning for our financial futures.”