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The secret to staying invested: Don’t get spooked


Money is still one of the top reasons why couples fight. Even though we like to view ourselves as rational beings, driven by an era of modern science, where digital and technological innovations reign, humans are surprisingly emotional when it comes to our money matters, and even more so when it comes to investing. Our investment decisions and actions are often based on rash spur-of-the-moment impulses and driven largely by our fears. We are easily influenced by our perception of what is happening to the economy, and if we feel that the markets are panicking, we panic too.

The role of our emotions has led to the birth of a whole new study field known as “behavioural science”. Here, researchers from the fields of economics, finance and psychology study the different biases that influence us when we invest, save and spend our money. It’s not only our personalities, upbringing and belief-systems that influence our investment decisions – scientists have identified over 50 emotional biases that come into play when we invest.

In the near future, researchers hope to be able to build models that will help predict what influences our investment choices and guard us against these rash decisions and impulsive actions.

According to Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments, lower returns are usually the result when investors act on their emotions. This cost is now known as “the behavioural gap”. In 2018, Momentum Investments’ analysis of ten years’ of client data showed that nearly one in four investors incurred a behavioural bias cost of 1% per year – losing about 10% of earnings over that ten-year period.


Retirement gurus Bruce Cameron and Wouter Fourie say these are the errors that we commonly make:

We chase returns

We chase returns – at all costs – jumping at the chance to buy a “hot share”. The problem with hot shares is that they often run cold soon after we’ve bought them. So the good run turns out to be quite a bad one.

We exit a market at its lowest

Having anxiously watched the decline of our investment, we decide it’s now or never and pull out – just for the market to pick up again. This often means that we lose a lot of money.

We lend our ears to hot gossip

We all have that friend who made a quick couple of thousand with this and that investment … and when we follow the same route, we lose money.



One of the hardest things for investors is to ignore their “gut feelings” and follow hard facts and data. Also, don’t believe every negative story that you hear about an investment. As Warren Buffett says: “Make informed decisions and investments with a long-term strategy, then stand by those decisions when markets go up and down.”

But what if your neighbour John really did make R1 million when he invested in stock bought from company X? Here are Paul Nixon’s basic rules to help you stay focused in the roller-coaster whirlwind that is investments:

  • Speak to an expert: Your financial adviser will help you set investment goals and develop a plan to help you get there.
  • Think long term: Time is your only friend when it comes to investing. The more you have, the greater the possibility of growth.
  • Remember the diversity basket: This time-old truth still stands. Spread your investments and your risk.
  • Save for a rainy day: Make sure you have an emergency fund so that you don’t have to tap into your long-term investments if something goes wrong.
  • Review your plan yearly: Check if you are still on track and rebalance your portfolios where necessary.

Follow your heart, but when it comes to investing, don’t get spooked – follow your plan and focus on the long-term horizon.

Sources:

The No 1 Reason Why Couples Fight

Winning In The Market With The Patience Of The Wright Brothers And Warren Buffett

Kirchen in artificial coma

“Behavioural finance” (pp 83-90). Bruce Cameron and Wouter Fourie in The ultimate guide to retirement in South Africa.

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