Investment decisions which are based on emotional impulses cost the average investor three per cent per year in returns, new research has found.
According to behavioural finance experts Oxford Risk, recent economic turmoil could result in even higher levels of lost returns this year.
The company noted that many investors have increased their allocation to cash recently, but pointed out that choosing cash savings over investments could cost around four to five per cent per year over the long term.
Furthermore, losses made due to timing decisions can cost the average investor approximately 1.5 per cent to two per cent per year over time. Oxford Risk calls this the ‘behaviour gap’, and it involves investing more money when the market is up, and divesting money when the markets are down.
“Many of these actions will mean that investors turn paper losses into real ones,” said Marcus Quierin, chief executive of Oxford Risk.
“If they don’t need to withdraw money for immediate expenses, then the losses are only virtual… until they panic and make them real.
“The investments in the news are not your investments. Retail investors should avoid watching the markets day-to-day as this will only increase anxiety to no useful end, and make you feel like you should be doing something, without any useful guidance to what that should be. Long-term plans should be looked at through long-term lenses.”
The company’s research found that in times of crisis, investors are likely to focus too much on the present and on the detail, and gravitate towards familiar financial decisions. This can lead to underinvestment or decreased diversification.
“Investors should focus on what they can control,” added Quierin. “It’s the most ancient advice there is, and still the most important. You can’t move the market or predict when it’s at the ‘bottom’ or the ‘top’.
“You can postpone discretionary spending and use tumultuous times as an opportunity to take stock of your long-term financial plans. And you can control the opportunity to benefit from the ‘risk premium’ – the long-term reward for owning shares that has eventually weathered every short-term storm yet.”