By: Lehani Marais
Investors should focus on long-term strategy to preserve wealth post-Covid-19
The market selloff in March resulted in three different investor reactions. Some wanted to increase exposure at the lower market levels, others wanted to sell their holdings, while a third reaction was to wait for markets to stabilise before investing again.
It is in times like these, says Lehani Marais, Director at Stonehage Fleming Investment Management South Africa, that investors risk destroying their wealth due to decisions over influenced by emotional and/or cognitive biases. “It is important for investors to stay focussed on their long-term investment strategy and not fall prey to typical behavioural biases”.
As the market spiralled downwards, clients became more focussed on the winners than the losers in their portfolios, according to Lehani. Fearing they would decline, she explains, some investors wanted to sell the profitable positions, and ‘lock in’ the gains, or in contrast, hold onto their losers in the hope that they would recover the losses. “Whether it is losing out on a bargain in the shop or witnessing investment portfolios decline, we as humans hate to lose. Investors tend to feel the pain of losses significantly more than the joy of gains”.
Research by Tversky and Kahneman (1992) showed that we feel the emotional impact of a loss more than double a gain of the same amount. “This behavioural bias, known as loss aversion, is exacerbated by the fact that equity market gains occur over a longer time period. As a result, they are less satisfying. Losses conversely, are typically experienced over a short and sudden period, making the experience much more painful. Regardless, the long-term result from selling winners and holding losers is ultimately a portfolio of losers” explains Lehani.
The human tendency to have too much confidence in our own abilities is known as overconfidence bias, says Lehani. “Following the -34% decline of the S&P 500 in March, some investors hoped they could accurately ‘time’ the market. Accordingly, they preferred a strategy of cutting their equity exposure when the market was down and reinvesting once the markets had stabilised”.
While selling high and buying low makes logical sense, the reality, says Lehani, is that it is very difficult to predict short-term market movements, particularly in highly volatile times. “In this case, an overconfidence in predicting how the market would perform would have yielded negative results as, against most investors’ expectations, the market went on to recover almost all the losses two months later.”
Herding bias refers to doing something because others are doing it. As fears of the spread of the virus crippled financial markets, investors began running for the hills, prompting others to follow suit. “Going against the herd can be extremely difficult, especially in a severe market decline, but for every seller there is a buyer. One could therefore argue that there are two herds moving in opposite directions and it is best to be following the herd that is buying bargains”, observes Lehani.
Looking ahead to the outcome of the Covid-19 pandemic, there are currently two polar views – optimism or pessimism. Investors, says Lehani, typically look for information that confirms their current belief – known as confirmation bias. As a result, they seek views that confirm what they already know, rather than looking for views that contradict theirs. “As an investor, it is important to recognise whether you tend to have a glass half full or half empty view, because this itself is a behavioural bias. Instead of focussing on news that supports your view, you should remember that there are a range of possible outcomes”, she says. “Now more than ever, it is important for investors to be aware of their emotions, and make sure these emotions are not driving their investment decisions. Ultimately, clients tend to achieve better investment results when they remain focussed on a long-term strategy”.
All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
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All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
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All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
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All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
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QUALIFIED INVESTORS
1. According to Art. 10 Para. 3 of the Swiss Federal Collective Investment Schemes Act (CISA), Qualified investors are considered:
a. Regulated financial intermediaries such as banks, securities dealers, fund management companies as well as asset managers of collective investment schemes,
b. Regulated insurance companies,
c. Public entities and insurance companies with professional treasury departments,
d. Companies with professional treasury departments;
e. High net worth individuals,
f. Investors who have entered into a written asset management agreement with a supervised financial intermediary (such as banks, securities dealers, fund management companies as well asset managers of collective capital investments).
2. According to Art. 6 Para. 2 of the Swiss Federal Collective Investment Schemes Ordinance (CISO), in particular Art. 10 Para. 4 CISA, qualified investors are also considered:
Independent asset managers and investors who have entered into a written asset management. agreement with independent asset managers to the extent that:
a. The asset manager as a financial intermediary is subject to the Money Laundering Act (MLA) of 10 October 1997 (Art. 2 Para. 3 lit. e MLA);
b. The asset manager is subject to a professional code of conduct which is recognized as a minimum standard by the supervisory authority, and
c. The asset management contract contains the recognized guidelines of a professional organization.
3. A high net worth individual is someone who can confirm in writing that they directly or indirectly have net financial investments of at least 2 million Swiss francs.
* Financial investments are bank assets (demand or time deposits), fiduciary assets, securities (including collective investment schemes and structured products), derivatives, precious metals as well as life insurances with a replacement value.
* Direct investments in real estate and claims from social insurances (including claims from the 2. and 3. Pillar), are not considered financial investments.
* The confirmation of financial investments has to be submitted no later than the time the collective investment scheme is offered and distributed.
* The advertiser or provider of the collective investment scheme must review the existence of the required financial investments if there are doubts as to whether the person qualifies as a high-net-worth individual.
* A written confirmation is not necessary if the required financial investments are deposited at the bank or the securities dealer who is also offering or distributing the collective investment scheme.
Private investment vehicles which have been set up for private persons can be treated like high-net-worth individuals as long as they hold net investments of over 2 million Swiss francs.
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All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
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All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing. This information is not directed at any US person or any person in the US and the information does not constitute an offer or solicitation to buy or sell shares or units in any Stonehage Fleming fund to any US person or to any person in the US.
The following pages contain information on collective investment schemes (both local and foreign) that have been approved by the Financial Sector Conduct Authority (FSCA) for distribution in South Africa, in accordance with the Collective Investment Schemes Control Act, No 45 of 2002 (“CISCA”). The information and materials have been prepared for information purposes only and do not constitute a personal recommendation or advice or a solicitation to buy any product or service. They do not take into account the financial circumstances, needs or objectives of the recipient. In addition to the information provided, you may wish to consult an independent professional adviser.
All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
I confirm I am accessing the website from the country indicated.
All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing. This information is not directed at any US person or any person in the US and the information does not constitute an offer or solicitation to buy or sell shares or units in any Stonehage Fleming fund to any US person or to any person in the US.
The following pages contain information on collective investment schemes (both local and foreign) that have been approved by the Financial Sector Conduct Authority (FSCA) for distribution in South Africa, in accordance with the Collective Investment Schemes Control Act, No 45 of 2002 (“CISCA”). The information and materials have been prepared for information purposes only and do not constitute a personal recommendation or advice or a solicitation to buy any product or service. They do not take into account the financial circumstances, needs or objectives of the recipient. In addition to the information provided, you may wish to consult an independent professional adviser.
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All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
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