Wealth management experts reveal the causes of investment horror

As Halloween approaches, wealth management experts are highlighting the top behavioural biases that can cause investment nightmares.

Drawing on decades of experience – and having seen many DIY disasters come across their desks – they talk about fear, greed, over-risking, believing the hype, anchoring and over-exposure as the most common spectres that haunt DIY portfolio performance.

FEAR AND GREED

Fear prevents investors from making constructive investment decisions when they should. Typically, when a market has reached extremes, fear and greed are the forces stopping a person from investing at the bottom of a market cycle or taking profit at the top – which is the obvious way to make money.

Fear of admitting you were wrong can also cause losses to be more extreme than they need to be. Investors can often ‘ride a stock down’ when it is plummeting rather than recognise their mistake, get out fast and limit their losses.

Lee Goggin is co-founder of findaWEALTHMANAGER.com.

OVER-RISKING

A common issue we see with client portfolios is ‘over-risk’. This is where clients are positioned inappropriately for their risk profile. We see 100 per cent equity holdings for DIY clients who think their portfolio is medium or low risk.

Equities are undeniably higher risk. We also often see leveraged portfolios too – great when markets go up, very bad when markets go down.

According to our client research, 85 per cent of private investors mis-categorise their risk objective to take on far too much risk for their profile (as found by a 2014 findaWEALTHMANAGER.com client survey).

Dominic Gamble is co-founder of findaWEALTHMANAGER.com.

BELIEVING THE HYPE

Most nightmarish investments I have seen have stemmed from supposedly ‘hot’ sectors that subsequently failed to live up to the hype.

Many investors will have the skeleton of a technology or internet fund from the late 90s in their closet; and although initially highly successful, a rash of ‘me-too’ fund launches and sky-high valuations should been enough to scare people away.

Sadly, many ordinary investors were too late to the dotcom party; the area peaked at the turn of the millennium and some saw their capital decimated.

The lesson: a sector that proclaims to be ‘the next big thing’ is probably as big a red flag as you can get that your investment will come back to haunt you.

The internet mania (eventually) brought a few success stories such as Amazon and eBay, but most companies failed spectacularly or never recovered their share price highs.

Rob Morgan is pensions and investment analyst at Charles Stanley.

OVER EXPOSURE TO A SINGLE SECTOR

People can sometimes tend to think, ‘I don’t need an adviser; I can just day trade’. But the problem is that DIY investors tend to be hugely momentum driven; or they have a big theme and ‘over-egg’ it.

Taking pharmaceuticals as an example, an investor might hold three or four biotech stocks – some start-ups to play a theme – then they might have four or five large-cap pharma names too.

Or you might find that an investor has an over-concentration in internet companies, of which probably only one is going to succeed out of a dozen. They go for all the associated companies simply because in the past one has done well for them.

We do see some very impressive funds come over to us, but unfortunately, you will often find investors all in equities, all in one theme and all in one currency.

John Langrish is head of investments at James Hambro Partners.

ANCHORING

Behavioural finance discusses the concept of ‘anchoring’ – attaching thoughts to a specific reference point, which is all too easy if an investor feels that they have identified a theme.

If investors are not careful, this can lead to decisions being made on what may be irrelevant or out-of-date information. A great example of how quickly things move is the raft of measures taken on a seemingly day-to-day basis by the Chinese authorities during the summer.

Both unexpected and swift, interventions like these change the landscape dramatically and can render previous assumptions redundant.

Chris Justham is relationship manager on 7IM’s London and South East-focused discretionary team.

PANIC AND KNEE-JERK REACTIONS

Investors need to bear in mind that during some periods, like the summer, company information on trading is much reduced and headlines instead focus on geo-politics. Sparse data can create false signals and there is limited new fundamental information to merit any change in strategy.

It is also worth bearing in mind that stock market liquidity is extremely low in the summer months. This tends to amplify the move in equities as there are few buyers when investors panic sell.

It is also a time when company information on trading is much reduced, and headlines instead focus on geo-politics. As a result, we believe it is best not to react to headlines when genuine news is so thin.

Duncan Carmichael-Jack is partner at Vestra Wealth.


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Saturday, October 31st, 2015 EN

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