Investment decisions are influenced by multiple factors. Rational ones like interest rates, economic growth, inflation but also others more related to intrinsic psychology and behavioral science. The study of the investment firm Schroders, helps to shade some light on how investors behave, their attitude toward risk, their fears and their expectations. The research explores the behaviors and attitudes of more than 25 thousand investors globally and the following 4 attitudes captured our interest.
An overall low confidence in people’s control over their investments emerged from the study. Lack of confidence seems to have a direct correlation with impatience: the average holding period of an investment is 2.6 year, while most of financial advisor recommend a time span of 5 years. If we deep dive by generations, we see that impatience grows among younger age groups with millennials cashing out from investment in less than two years.
While this could contribute to make the market more liquid
it also suggests that investors are banking a profit too early, hence missing
out future gains.
Learning: It is important to link investment to a sounded strategy. If the belief behind a specific investment is due to the conviction of the high potential of a business, don’t sell based on short time marginal gain, but opt for a longer-term sustainable profit. To manage impatience, we recommend investors to base their decisions not only on price but on analysis investigating if the conditions, which made them choose that investment at first instance, really changed.
Any investor understands the importance of a well-structured portfolio to level the risk, in line with his portfolio/risk attitude. The principle behind is simple and its implementation is quite straight forward when tapping into new investment. But how does it changes in a moment of macroeconomic adversity and market volatility? Looking at investment behavior during the 2018 market contraction, we see that 21% of the sampled investors, cashed out from any investment. In their case, the risk became too high and they decided to choose safety vs. potential profits. During the same time, we also see that majority of experienced investors making changes to their portfolio. Also in their case the market turmoil influenced their portfolio. The spin, however, is opposite with majority of them shifting to higher risk investments, showing confidence about future profits.
Learning: Confidence is a key factor to profit from investments. Market volatility increases the risk but also the profit potential. A nervous-free approach is a crucial enabler to make informed decisions and to take advantage of the situation.
We tend look at the future based on the experiences we
had in the past. This is true also when it comes to financial investments, with
investors expecting similar returns than the ones yield in the last years. Declining
this into a numbers, give us the optimistic 10%. This is as much, on average, investors
expect to profit from their investments. This so optimistic expectation is,
most probably, led by the recovery from the 2008 financial crisis. Indeed, the
years following one of the biggest stock market crashes were characterized by a
strong and long-lasting recovery.
Learning: Financial market performances have some cyclical behaviors which are influenced by both predictable and unpredictable events. While comparing past performance with future outlooks, we need to factor into the analysis all the current situational specificities which could influence the market: aging population, political crisis, productivity rates, protectionist trends….
Looking for income that could beat inflation, would bring us to consider allocating a part of the investment in emerging markets. As a whole, emerging market investments, delivered a double-digit growth in 2019 and the JP Morgan USD Emerging Market Bonds ETF (often used as a benchmark for emerging market investment) is up + 11% vs. last year. Higher profit comes together with a higher risk, as holder of Argentinian bond would know well. And this risk refrains 2 out of 3 from diversifying their portfolio in emerging market. According to the Schroders study only 31% of investors see emerging market investment as beneficial for their portfolio. And numbers tell us more with 24% thinking that these type of investments are “too risky”.
Learning: We believe that a stopper for many investors is
tapping into emerging market investment is the lack of information about the
specificity of the market and the aspects which could influence the performances.
Portfolio investment, investing via professional funds or platforms with
established reputation about the quality of the information provided to help investment
management, would help mitigating this point.