Investors shooting themselves in the foot

Investors continue to display self-destructive behaviours by trying to time the market, leading to significant losses.

This is according to NinetyOne sales manager Paul Hutchinson, who said that after the Covid-19 pandemic, we have been in a period of accelerating change.

The world has seen the fastest interest rate hiking cycle in decades, regional conflicts with the real fear of escalation, and increasingly concentrated financial markets driven by the ‘Magnificent 7’, deglobalisation, ChatGPT, and Bitcoin.

South Africans have had to contend with continued load-shedding, deteriorating infrastructure, and the possibility that the ANC will lose its absolute majority at the 29 May elections.

“But in a sea of change, the one constant is investors continuing to act contrary to their best interests,” he said. 

DALBAR, a financial services market research firm, has provided evidence of this self-destructive investor behaviour. 

DALBAR recently released the results of their 30th annual Quantitative Analysis of Investor Behaviour (QAIB) study to the end of 2023. 

This study measures the effects of investor decisions to buy, sell and switch into and out of mutual funds (unit trusts) over short- and long-term time frames.

“Unfortunately, the results of the QAIB study do not change. Due to their behaviour, investors earn less – in many cases, much less – than mutual fund performance reports suggest,” Hutchinson said.

In 2023, the US equity market was up 26.3%, whereas the average equity investor realised only 20.8%. This means that their behaviour cost them a significant 5.5% in returns.

This was also the third-largest average investor gap in the last 10 years. 

“Interestingly, the two largest average investor gaps both occurred in strongly positive equity markets – on average, investors are therefore not benefiting from the full equity market upside,” he said. 

“Over longer time periods, the average investor gap, while still significant, is lower, approximately 3.6% per annum over 5 and 10 years.”

However, Hutchinson said this investor behaviour cost is not unique to equity investors. It is also evident across fixed-income and bond investors.

In these markets, the average bond investor gap was 2.6%, even though the bond market only returned 5.5% in 2023. The average multi-asset investor realised a return of 9.6%.

“No doubt, South African investors behave the same way,” he said.