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The rollercoaster ride of emotional investing

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Extreme ups and downs in the market can cause investors to react emotionally rather than investing rationally.

The truth is we are not always as rational as we think. Poor investment decisions undermine good investment returns, and many investors could do with some help to protect them from themselves.

Investing is not a linear journey

There will be ups and downs and twists and turns that can send investors on a roller coaster ride of emotions. Fear and greed are the primary drivers of the biggest investment mistakes investors make. The pain of loss is felt twice as much as the pleasure from gains. This fear of loss often results in impulsive decisions that lead to undesirable outcomes.

South Africans will go through their retirement journey experiencing the highs and lows that come with investing and a seesaw of emotions. An investment approach that aims to manage damaging investor biases can help to end the cycle of disappointing investment outcomes and associated fear and anxiety.

A multi-managed portfolio helps investors weather economic and emotional storms

This approach to investing allocates savings and investments across multiple complementary asset managers to offer consistent, competitive, and less volatile returns. Poor performance in one asset manager’s performance is offset by the good performance in others within the same overall portfolio. Investments that optimally work together in this way are more likely to produce smoother return streams. They can also help investors to crowd out impulsive reactions when trying to time markets or impulsively react to short-term ‘noise’ and market volatility.

Periods of contraction and growth

Against a fragile and uncertain economic backdrop, many investors are still concerned about the impact of market volatility on their savings and investments. We cannot say for certain whether the markets will reward or punish investors in future. However, we do know that they will continue their cycle, swaying between periods of contraction and growth.

Shield against risk and flex towards opportunities

Investment approaches that have successfully weathered many market conditions can nimbly shield against inherent risks and quickly flex towards appropriate investment opportunities. A multi-managed investment approach deploys savings and investments to multiple complementary asset managers across different investments, strategies, regions and currencies at different times. Here, this sensible diversity can be valuable for investors to have on their side, strongly responding to the markets’ sways over time.

Manage behavioural biases

The rate of return earned on investments is important. However, the volatility of investment returns can let emotions win over reason, jeopardising wealth and investment outcomes. Investors anticipate a bumpy ride along the roller coaster of investing, but they don’t always understand just how bumpy it can get from time to time.

Seeking out diversified portfolio solutions that are tied to investors’ goals and comfort levels, by way of both investment returns and the journey getting there, can help manage behavioural biases. Importantly, such solutions can go a long way in ending the cycle of disappointing investment outcomes and associated fear and anxiety.


Riccardo Fontanella is the head of technical marketing at Alexander Forbes Investments.
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This article was written exclusively for finweek's 18 June newsletter. You can subscribe to the weekly newsletter here.

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