Do you risk paying investor behaviour tax?

29 September 2019 - 05:06 By LAURA DU PREEZ



South African investors just can't stop themselves and switch frequently among top-performing funds. This is despite much evidence locally and internationally that chasing top performers just doesn't work.And when the cost of this behaviour is measured, the results show that it costs one in four of us as much as 1% a year and one in 10 of us as much as 2.6% a year, says Paul Nixon, the head of technical marketing and behavioural finance at Momentum Investments.A few investors did marginally better (0.07%) when switching funds during a bull market, but their gains were quickly reversed by switches made after 2014 when the market turned flat. This 1% a year "behaviour tax" can reduce your investment value by 22% after 10 years, Nixon told advisers at a recent event hosted by the Financial Planning Institute (FPI).Momentum analysed the investment decisions of almost 80,000 users of its investment platform, which offers the ability to choose from more than 1,500 funds.It found over the decade between 2008 and 2018 that one in three investors switched funds at some point and 60% of those who switched, switched into a fund with better returns.But had the 17,900 investors who made on average one-and-a-half switches a year stayed with their original fund choices, they would have been better off by 0.4 percentage points a year, Momentum found.Nixon says 20% of the time that investors switch on the Momentum platform it is when their returns are good but they are looking for better returns, and 50% of the time it is when their returns are poor and they are looking to rectify that position.When markets are performing poorly there is more switching, with the average behaviour tax increasing to 1.1% a year, says Nixon.Nixon told the FPI event that Momentum also analysed 200,000 switches involving R100bn invested in the four most popular balanced funds on the Momentum platform between 2010 and 2018.It found "overwhelming" evidence that investors were moving money into funds that had over the past 12 months performed the best out of the four funds, but future performance was often not as good as it was in the past. The four funds performed better or worse relative to each other continuously over the period. Nixon says Momentum found that, had the investors on its platform who engaged in performance-driven switching chosen a well-diversified fund that matched their ability and tolerance for risk as suggested by their initial fund choices, instead of separate equity, bonds and property funds, they would have been better off, on average, by 0.7 percentage points a year. Morningstar also recently considered the returns an investor could earn by chasing performance, only to find investors would be better off in a single well-diversified fund.Victoria Reuvers, director and senior portfolio manager at Morningstar Investment Management SA, said Morningstar created two hypothetical "Performance Chaser" portfolios, one investing in low-equity balanced funds and one investing in high-equity balanced funds.In these portfolios investors switched their investments into the best-performing fund from the previous year at the start of each calendar year. The returns earned on these hypothetical portfolios were compared to two portfolios of unit trust funds managed by Morningstar - one low equity and one high equity.Reuvers says Morningstar's low-equity portfolio returned in total 6.3% more than the low-equity balanced Performance Chaser portfolio over a period just short of four years to the end of May. In other words, an investor with an investment of R1m who picked the Morningstar portfolio and remained invested for the entire period would have earned an extra R63,095 in returns. The difference is even more pronounced in the high-equity portfolio. In this case, the Morningstar Adventurous portfolio returned 13.93% more than the high-equity balanced Performance Chaser portfolio over almost four years, she says. An investor with an investment of R1m who picked the Morningstar portfolio and remained invested would have earned an extra R139,269 in returns.Reuvers says this highlights the benefits of staying invested in a robust and consistent strategy as opposed to backtracking and chasing yesterday's winners. She says a well-diversified portfolio that is designed to meet your investment goals while remaining within your risk tolerance is much more likely to result in long-term investment success than trying to buy yesterday's winners.Greed and fear are the two extremes that threaten all investment behaviour, says Nic Horn, a director at Citadel.In an article advising against do-it-yourself investing in a fintech world, Horn says a good adviser can stand between you and your emotions, preventing you from making hasty decisions and keeping you invested in strategies designed to deliver on your shorter- and longer-term investment goals.Horn says true diversification means investing across different asset classes, sectors and regions, and you should know what is allocated where.

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