Guest Post by kōura KiwiSaver: Breaking the cycle of emotional investing

Investing can feel like a pretty solitary and emotionally-driven pursuit, especially in times of

market volatility. Rationally, you know that there are both upsides and downsides to volatile

markets. And you know, based on history, that the markets will eventually rebound. But

even so, when you see your savings drop, emotions can be hard to rein in.

So, what can you do to break the cycle of emotional investing? Well In a recent podcast

from News of the Money World, co-hosted with NZ Everyday Investor’s Darcy Ungaro -

kōura Founder, Rupert Carlyon shared some ideas on how investors can make this

rollercoaster ride more comfortable. Here are some key takeaways:

It’s easy to get caught off guard

Let’s face it: downturns are not something most investors are used to. Rationally, we all

know that there will be ups and downs along the way; it’s just how investment markets

work. But having been in a bull market since 2009 (apart from the short interruption of the

Covid-19 crash in 2020), you’re probably not familiar with how downturns feel at a ‘gut

level’. That’s part of the reason why, during volatile times, controlling your emotions is so

challenging. 

How behavioural biases get in the way

As an investor, your personal instincts are not the best tools for making good decisions.

Our emotions stem from a number of ingrained behavioural biases, like our natural

tendency to try and fix things (even when they’re outside of our control). Moving to a

lower-risk fund during a downturn is a typical example of how this mentality can hurt your

long-term investments. Your emotions tell you that you need to protect your investments

from falling further, but what you’re actually doing is selling when the market is low. And as

a result, you’re essentially ‘locking in’ your losses.

Another way that emotions affect investing is overconfidence in your own judgement. ‘I

know best’, says the overconfident investor – better than what the theory dictates, better

than what the markets assume. Unfortunately, markets move too fast to be predictable, and

overconfidence can often come at a dear price.

The bottom line? No one knows the future. You can only draw some lessons from the past –

and even so, always with a pinch of salt.

Learning and unlearning from the Covid-19 crash

The Covid-19 sudden downturn of March 2020 is still fresh in the memory of many investors

as the infamous ‘Big Switch’. That’s when the markets suddenly crashed and thousands of

KiwiSaver members (seven times more than average) switched into lower-risk fund types,

hoping to protect their hard-earned money. Little did they know that only six months later

markets would have completely recovered their losses. Unfortunately for them, the horse

had already bolted.

Two years on, thanks to that hard lesson, there seem to be more educated conversations

around KiwiSaver. More people have grown to understand KiwiSaver’s long-term nature and

the importance of staying the course, as long as their risk profile doesn’t change.

On the other hand, given how short-lived the Covid-19 downturn was, some people may be

under the assumption that this downturn will only last a few months. It may be the case –

no one knows for sure – but historical data suggests otherwise. On average, market

downturns last two to three years: so emotionally speaking, that’s the scenario that

investors need to prepare for.

Thinking of switching providers?

So, you’ve been happily invested with the same provider for quite some time, but over the

past couple of years, returns have been subpar. The question is, is a weak performance

reason enough to change providers?

The key thing is not to judge funds based on performance alone, but rather understand why

a provider has achieved certain returns. What’s their strategy? And does their asset

allocation align with your goals and values?

Also, keep in mind that, while providers may outperform the market on a one-year, three-

year, or even five-year basis, it’s very rare that they can continue to do so in the longer

term. And that’s why it’s a good idea to choose your provider based on fundamentals like

fees and asset allocation first, and performance second.

Meanwhile, here are three things you can do to keep emotions at bay

Even if you consider yourself a rational being, make sure you don’t underestimate how

much emotions affect your decision-making. That doesn’t mean being unemotional or

purely logical. It means identifying what’s driving you and turning down the noise, because

one of the worst things that you can do is to use short-term data to make long-term

decisions.

In our News of the Money World podcast episode, we touched on three practical tips to

keep yourself safe from yourself:

●     First, flip the script and reframe what you’re going through into something positive.

Instead of looking at how much you’ve lost and can still lose, you can focus on the

opportunities ahead.

●     Second, consider setting rules to avoid impulsive decision, like having a sort of waiting

period before any decisions can be made.

●     And third, make sure you find people that you can talk with. Having conversations

about money can help you view things from another perspective, and with more clarity. It

could be your peers or, even better, a financial adviser. After all, it’s their job to challenge

you and share their knowledge, so that you can make better-informed decisions every step

of the way.

Still unsure?

Still unsure about things regarding your KiwiSaver account? Just ask kōura, They’re all about

empowering people on their lifelong financial journey, with quality digital advice. Click here

to find out more.

This content has been provided by KiwiSaver provider kōura Wealth as part of a paid

partnership.

Disclaimer: Please note that the content provided in this article is intended as an overview and as

general information only. While care is taken to ensure accuracy and reliability, the information

provided is subject to continuous change and may not reflect current developments or address

your situation. Before making any decisions based on the information provided in this article,

please use your discretion and seek independent guidance.