Advisers can curb the bad investment instincts of clients

The internet age has undoubtedly sped up the delivery of information dramatically but it seems investors aren’t necessarily digesting the message any quicker.

In the case of knowing when markets are low or high – and thus how to alter one’s portfolio accordingly – surely the culture of instant information has helped level the playing field here?

It seems not.

Article continues after advert

As this week’s Investment Adviser reveals, several multi-managers with risk-rated ranges are seeing more appetite for their racy offerings at a time when both stocks and bonds have undergone significant rallies since the trough of the financial crisis.

Okay, you might think that because investors are moving to higher-risk portfolios there is more exposure to areas that have not performed so strongly. But this is not necessarily the case either, as some multi-managers are raising their cash levels beyond what they would consider normal, as are some of the underlying funds.

So at a time when managers are becoming more cautious, investors are feeling increasingly comfortable and willing to put more skin in the game.

A recent Wall Street Journal blog by Jason Zweig highlighted a Dalbar study, which found the average investor in all US equity funds earned 3.7 per cent annually in the past 30 years – “a period in which the S&P 500 index returned 11.1 per cent annually”.

Mr Zweig goes on to say that while some of the underperformance is due to factors such as fund fees, there is a much more worrying impact.

The research, Mr Zweig notes, shows the biggest factor is that investors chase returns – “jumping aboard after a streak of hot performance and diving over the gunwales after it goes bad”.

So why are investors upping risk?

Perhaps it is because even the threat of renewed war in Iraq and conflict in Ukraine has failed to rattle markets.

Indeed, in the Financial Times last week, The Short View columnist James Mackintosh highlighted that, barring an upset, the first half of 2014 would be the first such period since 2003 where investors had walked away with a profit in bonds, developed world and emerging market equities, gold and commodities.

But as Morningstar’s European fund research director Chris Traulsen recently said in Investment Adviser, there is a “considerable body of evidence” that shows investors “greatly prefer avoiding loss to earning gains”.

It seems this set of circumstances provides a great environment for the financial advice sector to tout its wares.

Navigating this successfully for clients could prove significant if or when advisers end up battling for the business of newly-liberated pensioners who need help after chancellor George Osborne’s pensions overhaul.

Bradley Gerrard is news editor at Investment Adviser. John Kenchington is away