Don’t succumb to your emotions when investing for your future
In an economy that is declining, with rising unemployment levels, and businesses feeling the impact of the pandemic, most South Africans are feeling the financial strain and are making hasty financial decisions that could have worrying long-term effects.
Janine Horn, Financial Adviser at Momentum, says “Everyone wants to be more financially secure and give their families a brighter future. However, our behaviour often contradicts this, and we have seen that South Africans are dipping into precious investment and savings reserves to cope. However, understanding inherent biases that impact our decision making – especially in times of fear – could help us to avoid further costly money decisions.”
According to Momentum Investments’ latest Sci-Fi report, negative returns on investments as a result of the tough economic landscape have created problems for the households that earn enough to save and have resulted in more individuals accessing or changing their investments out of fear of not being able to cope.
“Investing is often taken for granted,” says Horn. “Presumably, investors are expected to make the right choices, deliberating on all the aspects that might affect the risk and return attached to that investment option. But when faced with risk or opportunity now, they tended to forget about their grand plan. The ability to stay the course is a key trait for successful investments, but we tend to forget that in the midst of a panic,” says Horn.
There is evidence that investors are significantly more driven by the fear of loss than they are by the prospect of an equivalent gain. They are nine times more likely to switch funds as a result of their current fund performing poorly than they would be due to the possibility that another fund may perform exceptionally well.
“The Covid-19 crisis has provided the perfect example of how fear and greed tend to influence us and challenge the logic of our decision-making process. While most of us understand the science behind long-term investments, it seems that in the face of a crisis, the logic goes out the window, and we do things that can severely hamper our financial wellbeing,” says Horn.
According to Horn, the best strategy is having an investment plan and sticking to it to circumvent emotional trading. “This is why it is so important to set your financial goals, both for the short- and long-term and never forget about either. Yet, our emotions tend to get in the way.” says Horn.
In uncertain times, Horn says it is crucial to deter emotional and fearful investing based on what others are doing. “Market activities may cause panic, but if you persevere, you are likely to avoid common investing mistakes and in due course be well-fixed in your long-term goals.”
Horn says it is important to remember these tips to avoid nasty investment habits driven by fear:
Market dips are fleeting. In periods when active and emotional investing can be profitable, data illustrates that a well-defined investment approach and staying the course through market volatility often yields the best long-term performance returns. Short-term trading is a lot more difficult in practice than it seems.
Have an approach that diversifies your investments
Equate your investments to your lifestyle objectives and have enough funds in low-risk assets, this brings an element of protection when other markets perform badly. A long-term diversified portfolio can help reduce emotional response to market volatility.
She concludes that understanding why we make the decisions we do, and overriding that detrimental ‘knee-jerk’ reaction that compels us to make rash decisions, remains critical to ensuring the long-term financial health of households.