Key points

  • Chasing past performance represents the sacrifice of future performance in exchange for current comfort. The reason investors make decisions that harm their long-term investment returns is rarely a lack of knowledge.
  • While investors are wired the same way worldwide, subtle cultural nuances can mean what works in one place doesn’t work in another. It’s not always obvious where the cultural fault lines lie.
  • Innovative advances in technology, data analytics, and behavioural design can allow advisers and institutions to provide better behavioural prescriptions for everyone, both at the start of an investment journey, and along its course.

From the Foreword to Momentum Investments’ ‘The South African investor behaviour tax and helping investors count what counts

Past performance is not a reliable guide to the future. Every investor, potential investor, and casual passer-by of an investment advert has seen this message innumerable times, and ignored it on every one of them.

Every regulator, adviser, and investment institution knows that such disclosures serve only to tick boxes, not to change investor behaviour. Yet just as past performance remains the primary factor in deciding to start a new investment, or make a change to an existing one, the warnings that this may not be wise remain the same. Chasing past performance represents the sacrifice of future performance in exchange for current comfort. The reason investors make decisions that harm their long-term investment returns is rarely a lack of knowledge.

Investors do not seek the poor outcomes they often end up with when they deviate from their ‘optimal’ plans. What they are seeking is comfort and confidence with their finances. However, in the clouds of emotional turbulence, the best course is often harder to see, and even harder to stick to. It’s not the reward that needs changing: we just need a more effective (and far less costly) means of sticking with the discomfort we’ll need to ensure to achieve it.

By viewing investing in a more holistic way – acknowledging that investments are not inherently good, but instead good for a particular investor for their particular goals and aspirations – we move beyond a narrow view of what it means to own a good investment portfolio, to a wider view of what it means to be a good investor. Investments that stand alone are harder to engage with than ones with a more obvious personal relevance, with the resultant emotional comfort with investing that comes with that.

Changing investor behaviour is hard. While the underlying psychological drives may be relatively few, the circumstances in which those drives express themselves are anything but. And while investors are wired the same way worldwide, subtle cultural nuances can mean what works in one place doesn’t work in another. It’s not always obvious where the cultural fault lines lie.

The key to unlocking these puzzles is data. Well-designed digital collection of data (of which this report is a valuable example) from the advisers and institutions that are the guardians, shapers, and trackers of investor behaviour can lead to a deeper understanding of behaviours in the face of changing circumstances. This does not happen without effort; however, with the right tools that work with advisers’ and institutions’ broad base of existing skills and knowledge to help refine and interpret this data, the task becomes achievable.

Innovative advances in technology, data analytics, and behavioural design can allow advisers and institutions to turn every interaction with their investors – across every type of market conditions in every country – into a source of data enriching investor profiles, and ultimately providing better behavioural prescriptions for everyone, both at the start of an investment journey, and along its course.

Contrary to fund performance, when it comes to improving investor behaviour, poor past performance is all-too-often a reliable guide to poor future performance. Initiatives and research like this conducted by Momentum Investments that encourage a more holistic, personal, approach and that move beyond ticked boxes and crossed fingers are an important change of direction: better financial outcomes from better investor behaviour and decisions.

Originally published by Momentum Investments in September 2019.