Investor behaviour matters, especially in periods of volatility

Numerous studies have been done on the negative effect on portfolio value of investor behaviour, and how vital it is for financial advisors to guide and manage their clients’ behaviour – particularly during periods of volatility. The common theme across these, and various other studies, is that investor behaviour can destroy material value, or, managing client behaviour through volatility can add material value. This value is usually quantified as 1.5% to 3.0% per annum.

Are South Africans more resilient?

We delved into this by computing the investor return of some of the largest multi-asset high and low equity funds in South Africa from their respective start dates and contrasted it with the total return of each fund over that time. In other words, we looked at how the average South African investor did with their trades, compared to how they would have done if they did not trade or switch, but just held on despite volatility. Based on our sample, the average annual underperformance of the average South African investor’s behaviour is also within the 1.5% to 3.0% range at 2.6%.

Source: Morningstar

What our study also revealed is a positive relationship between the volatility of a fund’s return relative to the peer group average, and the level of investor underperformance. When the fund's relative return fluctuates often, the fund and investor return differ more, or the behaviour gap grows bigger, confirming that uncertainty and volatility affect the decisions we make about our savings.

Source: Behavior Gap, Carl Richards

Now what?

During volatile, uncertain times many investors will be tempted to deviate from the long-term plan and hide in cash or switch to the top performing fund of last year. It is critical for investors to be aware of this and work with their financial advisors to avoid making emotional decisions. It is critical that investors choose, and stay invested in, investments that are appropriate to their risk profiles, needs and time frames. Wealth is not created by chasing the top performing funds every year, but rather by staying invested in good investments every year.

Source: Behavior Gap, Carl Richards