It’s all too easy to let emotions influence investment decisions in times of market volatility. After all, it’s human instinct to be responsive, but resisting the urge to take flight can prove rewarding. Take it back a few million years to prehistoric times; the fight or flight reaction meant the difference between life and death, survival depended on decisive action. As an investor, controlling these hard-wired behavioural biases and resisting the urge to panic, can prove beneficial.
In March, as markets reacted to the unfolding pandemic, in just one month, retail investors sold investment funds worth £10bn1, with many selling as the stock market was falling to its lowest level in eight years. By reacting and choosing this course of action, they missed out on the ensuing market bounce of nearly 30%.
Hindsight is a marvellous thing
Yes it is; but when it comes to investor behaviour, having foresight, i.e. insight gained by looking forward, is far more valuable because markets tend to bounce back over time. Although it obviously can’t be guaranteed. Various factors feed into people’s responses to different market occurrences, for example – what your objectives are, your risk tolerance, emotions, preferences, beliefs and past experiences. These can all result in different investor behaviour. Just one chosen scenario, a market fall, can lead to different behaviours: halting investing until markets become more stable, selling in case it’s the start of a market decline, or seeing a market correction as an opportunity to invest. Some beliefs may result in successful investment outcomes, others in behavioural biases that are counterproductive and imperil the chance of achieving your financial goals.
Kicking those behavioural biases into touch
We all suffer from some biases, the best mechanism to prevent knee-jerk reactions and defend against the influence of your biases, is to follow a robust, disciplined, well-thought-out investment process. Investing with a clear idea of what you want to achieve will determine how we structure your investments. You have a better chance of achieving your goals if you use them to frame all investment decision-making, whether you’re building a university fund or your retirement nest egg. We take the time to understand your objectives, apply a thorough investment process and advise you on the strategy most appropriate for your circumstances.
1The Investment Association, 2020
The value of investments and income from them may go down. You may not get back the original amount invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.