South Africans “taxed” themselves out of R100 million in investment returns as a result of fears around Covid-19. Jeanette Marais, Deputy CEO of Momentum Metropolitan Holdings and CEO of Momentum Investments, explains how to ensure you don’t do the same.
In his previous budget speech, Minister Mboweni mentioned a host of different taxes that the revenue man would soon be collecting from us. From personal income tax, to fuel taxes, corporate and carbon taxes – the list was long. But one tax he didn’t mention – and to his credit it is not an official tax (but I would argue it should be) – is behaviour tax.
The term, coined by our Momentum Investments Behavioural Science team, refers to the long lasting – and potentially very damaging – toll that our emotionally charged decisions have on our finances. In the investment world, as an example, investors who become fearful and hastily switch funds because markets are falling tend to “tax” their own investment returns. Research has shown that these investors never earn what they would have if they had remained calm, stuck to their plan and stayed invested.
The team, together with behavioural science experts at Oxford Risk, have done several pieces of in-depth research to understand how emotions like fear and greed impact our investment behaviour over time.
They recently looked at investor decisions as a result of the onset of Covid-19 which is a perfect example of a very scary and uncertain time for people. About R100 million was lost and 6.5% of investment value was destroyed on average because of investors switching to lower-risk investments in reaction to Covid-19-related market volatility between April and December 2020. As a result, many South African investors’ savings and investment strategies suffered significant setbacks that they could have avoided.
These fear-based decisions are rooted in the stress chemical, cortisol. Our emotions become amplified when the survival of our family, the happiness of our loved ones and our personal futures are in question. It’s therefore easy to see why emotions are inextricably linked to our personal finances.
But as creatures ruled by these innate feelings, are we powerless to override this truth and change these behavioural biases? Luckily, the answer is no. And the ultimate goal is to use this research to help South Africans avoid the negative implications that cost them in the form of a behaviour tax. After all, we can’t be financially successful if our actions are adding to an already long list of taxes we need to pay.
What can you do? Have a look at the Money Heroes videos on the Momentum website, where we speak about all things money and finance, and we very often reiterate the importance of building and engraining good financial habits. When it comes to our money behaviour and the neuroscience behind it, these are some of the emotions to be aware of and good habits to cultivate around them:
Being able to pinpoint the exact emotion may take some work and self-awareness. But even just being aware that there are indeed underlying feelings that drive our financial choices is a step toward avoiding damaging decisions. Just as you may practice mindfulness in your everyday life, bring it in to your finances. Take a deep breath, sleep on it and review the choices in the clarity of a new day or ask your adviser to guide you.