Your portfolio

Your cart is empty. Go to All funds.

Investor behaviour matters, especially in the super election year

Investor behaviour matters, especially in the super election year

Related links

No related links

2024 will be the biggest election year in history as seven of the world’s ten most populous nations go to, or have gone to, the polls. This means that close to half of the world’s population will have the opportunity to cast their vote for their preferred national leader and/or governing political party this year. Although this is a phenomenal achievement for democracy, it is daunting to think of the short-term volatility and uncertainty it may cause as the market absorbs the various polls and results that will be flooding news flow throughout the year. This is all happening in addition to the market anticipating, or hoping for, an interest rate cutting cycle, while also navigating elevated geopolitical risks. Which is why the 2024 “super election year” should come with a health warning for investors, as investor behaviour matters. A lot.

There are many ways to skin the “behaviour gap” cat

Numerous studies have been done on the negative effect on portfolio value of investor behaviour, and how vital it is for financial advisors to guide and manage their clients’ behaviour – particularly during periods of volatility. For example, Vanguard trademarked their work on this topic “Advisor’s Alpha”, Morningstar published a report on “The Value of Advice” and Dalbar annually publishes a “Quantitative Analysis of Investor Behaviour (QAIB)” study revealing what the average investor achieved relative to what the market delivered. The common theme across these, and various other studies, is that investor behaviour can destroy material value, or, managing client behaviour through volatility can add material value. This value is usually quantified as 1.5% to 3.0% per annum.

Are South Africans more resilient?

We used a similar method as Dalbar mentioned above to compute the investor return of some of the largest multi-asset high and low equity funds in South Africa from their respective start dates and contrasted it with the total return of each fund over that time. In other words, we looked at how the average South African investor did with their trades, compared to how they would have done if they did not trade or switch, but just held on despite volatility. Based on our sample, the average annual underperformance of the average South African investor’s behaviour is also within the 1.5% to 3.0% range at 2.6%.

Source: Morningstar

What our study also revealed is a positive relationship between the volatility of a fund’s return relative to the peer group average, and the level of investor underperformance. When the fund's relative return fluctuates often, the fund and investor return differ more, or the behaviour gap grows bigger, confirming that uncertainty and volatility affect the decisions we make about our savings.

Source: Behavior Gap, Carl Richards

Now what?

2024 is unlikely to be any more predictable than the frequently labelled “unprecedented” years investors have experienced since the outbreak of covid in early 2020. So once more, investors will be tempted to deviate from the long-term plan and hide in cash or switch to the top performing fund of last year. It is critical for investors to be aware of this and work with their financial advisors to avoid making emotional decisions. It is critical that investors choose, and stay invested in, investments that are appropriate to their risk profiles, needs and time frames. Wealth is not created by chasing the top performing funds every year, but rather by staying invested in good investments every year.