Understanding investor behaviour
The world of behavioural sciences has become more complex over the past decade. In 2019, the Organisation for Economic Cooperation and Development (OECD) took an important step in cutting through this clutter with the release of the BASIC™ framework.
Thoroughly researched and tested with some of the finest behavioural science minds globally, a list of over 200 recorded cognitive biases or errors in thinking was consolidated into four behavioural problems.
The ABCs and Ds, of investor behaviour
In diagnosing, measuring, and tracking behavioural interventions that will help clients make better investment decisions, Momentum Investments has adopted the BASIC™ framework. When we think of behavioural problems, we think “ABCD”.
Momentum Investments published a white paper in 2019 showing that investors were costing themselves around 1% per year in lower investment returns especially during choppy markets.
The ABCD-framework sheds some light on the “behaviour tax” that South African investors impose on themselves.
Firstly, we often focus our Attention (A) on investments that have performed very well or very badly. This leaves us greedy to take part in high-yielding investments that make us look smart on the one end and fearful of our past investment choices on the other end, as yesterday’s winners are today’s losers.
Pay attention to what worksWhen making investment decisions, our limited attention is often drawn to the wrong thing. Not putting all your eggs in one basket — i.e. spreading your risk, and sticking to your plan are proven strategies for successful investing.
Our belief system
Secondly, we’ve just outlined a Belief system (B) to make sense of a complex world. We buy investments that have performed well and sell those that haven’t. While this sounds good, the world doesn’t work that way — quite the opposite, in fact. Following this strategy means that we often end up in the wrong place at the right time and miss out on the returns we deserve. Everything is cyclical and it’s impossible to predict tomorrow’s winners on yesterday’s results because we don’t know where the turning points in the cycle are.
Forget the past and focus on your goalWhy do we continue to ignore the fact that past performance is no guarantee of future success? At Momentum Investments we focus on the only thing you should be focusing on: your investment goal.
Thirdly, this belief system informs our investment Choices (C). Unfortunately, we don’t focus on the things that matter, like investments designed to achieve our goals.
Build a rock solid portfolioVariety is the spice of life, it is said. However, is wide choice really such a good thing? At Momentum Investments we know the best combination of investments to get you where you need to be.
Finally, this ultimately leads to a Determination (D) or willpower problem as we become despondent with a strategy that’s not yielding the desired results, and find it difficult to stay invested.
Always stay in the gameInvestors often end up in the wrong place at the right time. Why? They get anxious and pay for emotional comfort with future returns. At Momentum Investments we believe investing can be simple: get invested in a solution focused on your goals, and then do absolutely nothing.