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South Africans cash into savings and investments to cope with covid-19 fallout, says study

29 April 2021 Momentum

Avoiding poor investment habits driven by fear

South Africans under pressure as a result of Covid-19 and the subsequent nationwide lockdown are making hasty financial decisions that could have worrying long term effects. According to the latest Momentum Household Wellness Insights Report, dipping into precious savings and investment reserves were revealed as one of the top five selected coping strategies of households during lockdown. However, understanding inherent biases that impact our decision making – especially in times of fear – could help us to avoid further costly money decisions.

This is according to Paul Nixon, Head of Behavioural Finance at Momentum Investments, who says that the report indicates that nearly half of South African households experienced financial challenges over this period, such as a reduction in household income, or a struggle to pay debts. “This level of pressure also spills over into the savings and investment space. Negative returns on investments as a result of the tough economic landscape have created problems for the households that earn enough to save, and has resulted in more individuals accessing or changing their investments out of fear of not being able to cope,” says Nixon.

He points to the findings from Momentum’s Behavioural Finance white paper – Understanding the great forces that rule the world: A study on South African investor behaviour – which pegged fear and greed as the two strongest driving forces that influence investors, and challenge the logic of their decision-making process.

“Where fear tends to make individuals switch - or even cash out - investments as soon as underperformance looms, greed often motivates investors to take an ill-advised gamble and switch to higher risk investments, lured by the possibility of higher returns.

However, there is now evidence that investors are significantly more driven by the fear of loss than they are by the prospect of equivalent gain. They are nine times more likely to switch funds as a result of their current fund performing poorly, than they would be due to the possibility that another fund may perform exceptionally well,” says Nixon.

The work forms part of a series of studies and research as part of the Momentum’s Science of Success initiative – a platform where data and insights are brought to life to demonstrate how certain behaviours can accelerate or decelerate our journey to success. By studying how our emotions impact our financial success, this body of work forms a crucial building block to understanding the science of success.

Nixon, along with Professor Evan Gilbert from the University of Stellenbosch's School of Business and Dirk Louw, an actuarial analyst at Transaction Capital Recoveries, studied the behaviour of 23 000 local investors over time. The result was a detailed understanding of the motivation behind our financial decisions and how this improves or derails our financial success.

“From dumping stock to panic-buying toilet paper, the Covid-19 crisis has provided the perfect example of how fear and greed tend to influence us, and challenge the logic of our decision-making process. While most of us understand the science behind long term investments, it seems that in the face of a crisis, logic goes out the window and we do things that can severely hamper our financial wellbeing,” says Nixon.

With that said, Nixon adds that times of high volatility and significant economic stress, are in fact when investors need to be the most level-headed. “Understanding why we make the decisions we do - and overriding that detrimental ‘knee-jerk’ reaction that compels us to make rash decisions - remain critical to ensuring the long-term financial health of households,” says Nixon.

Quick Polls

QUESTION

Financial behaviour experts suggest that today’s risk modelling methodologies ignore your client’s emotional ability / behavioural capacity. What are your thoughts on spicing up risk profiling tools to make allowance for your client’s financial behaviours

ANSWER

[a] Bring it on; my client’s make too many irrational financial decisions
[b] Existing risk profiling tools are adequate
[c] Risk profiling tools should be based on the model / rational client
[d] The perfect risk profiling tool is science fiction
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