South Africans under pressure as a result of the Covid-19 lockdown are making hasty financial decisions that could have worrying long term effects, data from Momentum Investments shows.
A report released by the group this week shows that one of the key strategies being used by households during the lockdown is dipping into precious savings and investment reserves.
The report indicates that nearly half of South African households experienced financial challenges over the lockdown period, such as a reduction in household income, or a struggle to pay debts.
“This level of pressure also spills over into the savings and investment space,” said Paul Nixon, head of Behavioural Finance at Momentum Investments.
“Negative returns on investments as a result of the tough economic landscape have created problems for the households that earn enough to save, and has resulted in more individuals accessing or changing their investments out of fear of not being able to cope.”
Where fear tends to make individuals switch – or even cash out – investments as soon as underperformance looms, greed often motivates investors to take an ill-advised gamble and switch to higher risk investments, lured by the possibility of higher returns, Nixon said.
However, there is now evidence that investors are significantly more driven by the fear of loss than they are by the prospect of an equivalent gain.
“They are nine times more likely to switch funds as a result of their current fund performing poorly, than they would be due to the possibility that another fund may perform exceptionally well,” said Nixon.
Nixon, along with Professor Evan Gilbert from the University of Stellenbosch’s School of Business and Dirk Louw, an actuarial analyst at Transaction Capital Recoveries, studied the behaviour of 23,000 local investors over time.
The result was a detailed understanding of the motivation behind our financial decisions and how this improves or derails our financial success.
“From dumping stock to panic-buying toilet paper, the Covid-19 crisis has provided the perfect example of how fear and greed tend to influence us, and challenge the logic of our decision-making process.
“While most of us understand the science behind long term investments, it seems that in the face of a crisis, logic goes out the window and we do things that can severely hamper our financial wellbeing,” said Nixon.
With that said, Nixon added that times of high volatility and significant economic stress, are in fact when investors need to be the most level-headed.
“Understanding why we make the decisions we do – and overriding that detrimental ‘knee-jerk’ reaction that compels us to make rash decisions – remain critical to ensuring the long-term financial health of households,” he said.