An adviser brings an external, objective perspective to the investor’s financial plan
Global market movements, changing economic policies and unpredictable geopolitical developments all contribute to an investment landscape teeming with both opportunities and challenges. Amid this backdrop, investors are constantly making decisions, assessing risks and charting the course of their financial voyage.
While numbers and market analyses play a crucial role in making these investment decisions, human nature is often an overlooked player. Psychological factors, particularly behavioural biases, have been shown to significantly influence investment philosophy and strategy — either propelling investors forward or serving as psychological roadblocks, undermining optimal financial outcomes.
Exploring behavioural biases in offshore investing
In the realm of investing — offshore or otherwise — the emotional impact of losses tends to outweigh equivalent gains. This bias, known as loss aversion, can greatly influence investor decisions, leading to an excessive focus on avoiding losses rather than on achieving potential gains. For instance, finding R100 or losing R100 are not perceived equally by most investors. Negative emotions, like sadness, anger and fear, triggered by loss, often have a more profound effect than the positive emotions triggered by gain.
Therefore, an investor who previously experienced an offshore investment loss during market downturns could hesitate to reinvest, even when the fundamentals present a favourable scenario. This asymmetric perception of gains and losses can obstruct balanced decision-making processes.
Intertwined with loss aversion is what’s called recency bias. This is the tendency to weigh the latest information more heavily than older data. For instance, the global financial crisis of 2008 led many investors to shun equities for years, missing out on their subsequent recovery. This behaviour often magnifies during episodes of significant market movements, such as the currency devaluations in emerging markets, leading investors to make reactive decisions based on the latest occurrences rather than conducting a thorough analysis of long-term trends and fundamental investment strategies.
Investors also often anchor their perceptions around the original purchase price of an investment, a phenomenon known as anchoring bias. As such, when an investment loses value, they may overlook its current intrinsic value and focus instead on their initial outlay. This bias can lead to holding onto overvalued investments, thus negatively affecting portfolio performance.
Conversely, market booms often breed overconfidence bias. Investors, buoyed by a rising market, may overestimate their investment acumen, which can expose them to considerable risks when the market tide turns. Likewise, confirmation bias can lead to skewed perspectives. For instance, investors losing faith in their domestic economy may interpret data in a way that reaffirms their pessimistic view, potentially leading to undiversified offshore investments without proper risk assessment.
Overcoming behavioural biases
Effectively overcoming behavioural biases starts with self-awareness. A grounded understanding of one’s own predispositions can act as a shield, enabling investors to think more critically and objectively when considering offshore investments.
Another robust approach to mitigating the impact of these biases is an emphasis on education and continual learning. By staying informed about the global economic landscape and understanding the intricacies of different offshore markets, investors can counteract the influence of phenomena like herd mentality and recency bias.
Lastly, appointing the services of a trusted financial adviser can also play a pivotal role in navigating these biases. An adviser brings an external, objective perspective to the investor’s financial plan. They can offer valuable insights, informed not only by their experience and expertise but also by their independence from the emotional entanglements that often cloud an investor’s judgement.
As investors, we’re not always the rational, objective decision-makers that traditional economic theory makes us out to be. Instead, we’re humans, swayed by a complex array of emotions and biases that shape our perceptions and judgements. It’s this intricate intertwining of financial acumen and human psychology that makes investing a nuanced and multidimensional process.
Investing, at its core, entails a journey of choices and trade-offs, charted on a global canvas. With self-awareness, continual learning, and the guidance of trusted professionals, investors can not only correct their trajectory but use these biases as signposts, teaching valuable lessons about decision-making processes and aligning investment strategies with financial goals.
— Brandon Naidoo is Liberty Lead Specialist in Investment Propositions
Disclaimer:
This article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice. The material has been created for information purposes only and does not contain any personal recommendations. While every care has been taken in preparing this material, no member of Liberty gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy, or completeness, of the information presented. Past performance cannot be relied on as an indication of future performance. Investment performance will depend on the growth in the underlying assets, which will be influenced by prevailing market conditions. Any recommendations made by a financial adviser or broker must take into consideration your specific needs and unique circumstances. Please consult your financial adviser should you require advice of a financial nature and/or intermediary services.
Liberty Group Limited is a licensed Life Insurer and an Authorised Financial Services Provider (no 2409).
About Liberty
Liberty is a wholly owned subsidiary of The Standard Bank Group and is currently one of the largest providers of long-term insurance solutions to South Africa’s retail affluent market. With a strong and relevant brand of more than 60 years, Liberty offers an extensive, market-leading range of products and services to help clients build and protect their wealth and lifestyle. This is enabled by Liberty’s 3 000-strong tied distribution force that expertly equips customers with knowledge to make financial decisions that add value throughout their various life stages. Liberty’s incorporation into Standard Bank provides synergies and advantages not only in South Africa but across the African continent, positioning Liberty as an integral part of a universal financial services organisation, focused on delivering exceptional customer experiences and superior value. Liberty’s wholly owned asset manager STANLIB is one of the biggest retail unit trust managers (including money market) in South Africa, with award-winning capabilities in property and fixed income, who together with their market-leading offshore partners are able to provide unique investment opportunities for clients. Liberty Group Ltd is a licensed life insurer and an authorised financial services provider.