Institutional investors don’t have as much confidence in expected equity returns and the market valuation of local equities as financial advisers do.
According to institutional investors who participated in the South African Investor Confidence Index survey this month, we should see zero nominal returns over the next six months and negative real returns over the next 12.
By contrast, financial advisers who participated are still hoping for an average expected return above inflation from JSE equities in the same periods.
Executive director at the Institute of Behavioural Finance Gerda van der Linde says almost 70% of the institutional participants view the market as expensive — the rest see it as fairly priced. Only half of financial planners see it as expensive.
Analysing the results of the survey, Van der Linde has come to the conclusion that it is financial advisers who may be overly optimistic — or more than the market signals justify, at any rate. How does this affect their clients? Well, if financial advisers aren’t in tune with clients’ sentiments and motivations, they could be erring when it comes to assessing their needs. Advisers need to have a good grasp of a client’s risk tolerance and personality type when it comes to investing and not lose sight of this when giving advice.
“Financial advisers need to rethink how they communicate with their clients. They should focus more on asking questions and listening to their clients’ answers, as well as discussing with their clients risk tolerance and the impact of risk on investment returns over various investment periods,” suggests Van der Linde. In volatile market conditions, mutual trust and good communication are particularly important.
When it comes to a strategy with regard to equities, Theo Vorster, chairperson of the Institute of Behavioural Finance, suggests phasing investments into equity portfolios. This is a rational approach that will ensure investors don’t miss the lows in the volatile market. It will also reduce the impact of high prices. Investors shouldn’t be rushed into the equity market — but nor should they listen to “noise” and focus narrowly on market volatility when considering investment risk.
When it comes to the Crash Confidence Index, 73% of institutional investors think there’s a less than 10% chance of a catastrophic market crash — in keeping with results in previous years.
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