Emotions cost investors dear, research finds
The Financial Times contained an article explaining how research has found investors lose an average of 3 per cent a year in returns to emotionally driven investment decisions. It also found the gap that widens significantly in times of steep volatility such as the current pandemic.
These decisions can be, to sell low and buy high, to hold too much in cash, and to focus too much on the short term.
We are big believers that the investment strategy that you can stick to over the long term is the best one for you. A large part of what we do is to ensure our investment strategies do not suffer from emotionally driven decisions. The first part of that is managing our emotions as advisers.
We use a systematic investment process driven by evidence rather than feeling. With our clients, we constantly look to reinforce the importance of having a long-term investment strategy. We also look to help our clients manage their own emotions when they arise. An example of this was in March when the vast majority of our clients did not make any unwise investment decisions driven by emotion during the crash.
The confusing investment path to saving the planet
This article, also from the Financial Times, walks through the basics and complexities of ESG investing. To completely turn your portfolio green, many hurdles must be overcome, argues the writer, who insists it is worth making the effort. It is fair to say ESG investing has become an ever-increasing interest to the public, financial services and many companies who pledge to have net zero emissions before 2050.
With that, the Covid-19 pandemic has only hastened the trend, heightening interest in sustainable portfolios in general.
We have many clients who invest in a socially responsible manner and have created portfolios which invest in a socially responsible manner.
Negative rates are here already for some investors
Investors holding a total of £9.5bn are suffering negative returns just so they can keep their savings in cash funds, The Sunday Times reports.
While the threat of negative interest rates looms, money market funds are already charging savers for holding money, rather than paying a return in real terms,
The research found five of the 14 most commonly held money market funds left investors worse off over the past year because of their fees. A further £7bn of savers’ money held in these funds earned 0.1% or less.
Our own portfolios incorporate cash funds to varying degrees. In doing so we accept that returns from these funds will not be stellar. What they are part of however, is a portfolio designed to get suitable long term returns for the level of risk that it takes. The divers of returns in these portfolios will be global equities. What cash and other lower performing assets do, is to provide a defensive aspect to a portfolio. Growth assets like equities are not always growing. They fall in value often. Defensive assets tend to fall in value much less. This helps the portfolios offset the temporary falls in value which are a feature of equity investment.
As I said before, the strategy that you can stick to is the best one for you. If you take too much risk with your portfolio, then your decisions can be driven more by emotions in times of market stress. Having a portfolio that could experience temporary falls in value more in line with what you are comfortable with could help you stick to your investment strategy.
‘You would be lucky to get your money back’: annuity expert warns of negative rate danger
Another article focusing on the impacts of negative interest rates. This time it centers on annuities and is in The Telegraph.
Over the last 10 years, the purchasing power of a £100,000 single-life annuity bought by a 65 year old has fallen from £6,555 to £4,760. To get their money back that means they would have to live to at least 86, which is longer than the average life expectancy.
The articles goes on to speculate that if Britain were to see negative interest rates there will be a chance that annuitants would be lucky to even get their money back.
We consider annuities for all our clients when they want to take a regular income from their pensions. Whilst we do not recommend them often, they do have their place when considering the best option for a client. It is also useful to note that certain clients can get better annuity rates if a provider believes their life expectancy were lower than average for whatever reason.