In the ever-evolving landscape of investment, understanding investor behaviour remains crucial. The recently released Dalbar 30th Annual Quantitative Analysis of Investor Behaviour (QAIB) study sheds new light on this topic – or at least reinforces some valuable lessons.
We have broken down some of the valuable insights for Kiwi investors striving to optimise their strategies, so you can reap the benefits of renowned financial research.
The Dalbar study teaches us a very important thing: Investors often struggle to achieve returns that match broader market performance.
Despite the overall market's gains, investor returns frequently fall short. The 2024 study findings reveal the average investor's annualised return over the past 30 years significantly lags the returns of the S&P 500 index.
This discrepancy is not new; it continues to highlight a critical issue in investment strategy and behaviour.
The study attributes this performance gap primarily to behavioural biases, where investors often make decisions driven by emotion rather than a well-thought-out strategy.
The most common biases include:
Herd Mentality: Investors tend to follow market trends rather than making independent, rational decisions. This can lead to buying high during market peaks and selling low during downturns. In both cases you’re missing out on the upswing as markets fluctuate.
Overconfidence: Many investors overestimate their ability to time the market or pick winning stocks, which can result in less-than-stellar investment choices. Picking stocks is quite literally a gamble, and not one that often pays off.
Short-Term Focus: A preoccupation with short-term market fluctuations often causes investors to deviate from their long-term plans, potentially undermining their overall returns. Markets can look grim occasionally; but by the time we see the impact of a downturn, it’s usually already over. There’s no point acting on everyday movement of markets when they will always return to the mean in time.
You don’t have to look far afield to see a compelling example of how emotional decision-making can lead to detrimental outcomes. Just think of the example set by KiwiSaver investors who switched their investments from growth to conservative funds during the early months of 2020.
Between February and April 2020, a staggering 88,112 KiwiSaver fund switches occurred, moving from growth to conservative funds—a figure 3.5 times higher than the prior corresponding period. Notably, March saw a dramatic spike, with switching activity 6.7 times higher than usual. This peak coincided with the month experiencing the most significant single month decline in equity asset values since October 2008.
This mass exodus from growth funds to conservative funds was driven by panic over the market's sharp downturn during the onset of the COVID-19 pandemic. While these switches might have seemed prudent at the time, they resulted in locking in losses that could not be recovered as markets rebounded one month later. Investors who acted on short-term fears missed out on the subsequent recovery and bull market which carried on for a future 18 months.
For example, the S&P500 declined 28.5% then surged 98% over the following 18 months. Closer to home our market declined 23.8% and then rallied by 41.6% over the time period. This highlights the risks of making reactive decisions based on market volatility; you never know what is happening next, and it might be something quite spectacular that you wish you could have captured.
So, what can you do to avoid these risks and make better decisions for your long-term investment strategy? A few suggestions:
Adopt a Long-Term Perspective: Emphasise long-term goals rather than reacting to short-term market movements. A well-diversified portfolio aligned with your risk tolerance and financial objectives is crucial.
Regular Review and Rebalancing: Periodically review and rebalance your portfolio to ensure it remains aligned with your long-term goals and risk tolerance.
Seek Professional Advice: Engaging with a financial adviser can provide valuable guidance and help you stay disciplined in your investment approach, mitigating the impact of emotional decision-making.
Educate Yourself: Continuously educate yourself about investment principles and market dynamics. Knowledge can empower you to make more informed decisions and avoid common pitfalls.
Face-to-Face Advising: Having a face-to-face adviser can be invaluable, especially during volatile periods. This personal support can provide the reassurance and discipline needed to stick to your long-term investment strategy and avoid costly, emotional decisions.
The Dalbar study, alongside real-world examples like KiwiSaver switching behaviour, serves as a timely reminder of the importance of disciplined investing and the impact of behavioural biases on investment performance. We’ve seen the consequences of what can happen otherwise.
By acknowledging these biases and adopting a strategic, long-term approach, Kiwi investors can better navigate the complexities of the market and work towards achieving their financial goals.
Incorporating these insights into your investment strategy not only enhances your potential for better returns but also reinforces the importance of a thoughtful, measured approach to investing, supported by expert, face-to-face guidance.
Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 373.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
