Nixon says investors are exposed to an emotional roller-coaster, which climbs with a bull market and comes crashing down as market sentiment turns bearish, and acting on these emotions results in a cost in the form of lower returns. This cost is commonly referred to as a “behavioural gap”.
Dixon says 17600 Momentum Wealth investors have been analysed between 2008 and last year. It was found that nearly one in four investors accumulated a behaviour gap of 1 percent a year, more than 10 percent over 10 years, and during the market crash of 2008/9, twice as many investors were influenced, and the behavioural gap grew to 1.1 percent, or more than 11 percent over 10 years.
“The behavioural gap is essentially a form of self-sabotage to investors’ future financial success, and our research shows that it is both bigger and wider-reaching in tough economic times. Given that the economy shrunk by a shocking 3.2percent in the first quarter of 2019, South African financial advisers should be playing a pivotal role in making investors aware of their behaviour, and helping them avoid such unnecessary costs to ensure that they are best positioned to reach their investment goals,” says Nixon.
He says the best way to this is to shift investors’ focus away from tracking arbitrary market benchmarks and towards goal-based investing and personal benchmarks.