Emotions are key in market psychology, and sometimes, it is difficult to be composed and rational when the market outlook is bleak. As we continue to feel the repercussions of the uncertainties over COVID-19 recovery, the Ukraine-Russia conflict, rising inflation, global interest rate hikes, and global supply chain disruptions, a global recession looks likely on our horizon.
The growing anxiety around the unpredictable market outlook raises concerns that investors may make knee-jerk, emotionally-charged reactions to market turbulence, such as pulling out of portfolios central to their long-term investment strategy.
Emotional investing is using different emotions to make investment decisions, relying more on one’s reaction to the market trends than investing fundamentals such as technical analysis. We have seen that emotional investing is more common among those who manage their own portfolios, rather than those who engage with a financial consultant.
According to a survey conducted by Magnify Money in 2021, roughly 50 per cent of those who manage their portfolios said that it was a struggle to keep emotions out of investment decisions, and 40 per cent have lost sleep over the stock market.
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We have also seen that the fear of missing out on investment opportunities generated by hype through avenues such as social media, has become a trigger for emotional investment decisions. With the growing influence of social media in the financial education space, we have seen the emergence of some bad actors in the industry. It is important that investors are not caught on the wrong side of their emotions.
During their investment journeys, investors may go through a rollercoaster of emotions, also known as the emotional cycle of investing. Riding the rollercoaster is not easy, and as human beings, it is natural for us to feel some form of emotion when we look at the performance of our assets, from jubilation in a bull market to disappointment in a bear market, and make decisions based on these emotions.
When an investor makes an emotion-based decision to respond to market events, it can create an illusion of control over both his assets and his emotions. However, these reactionary decisions may not be the right decision, especially in the long term. The most common impact is buying or selling remorse.
In the same study conducted by Magnify Money, two-thirds of investor responders expressed regret over making impulsive or emotionally-driven investment decisions, with a higher proportion of Gen Zers (85 per cent) and millennials (73 per cent) expressing buying or selling remorse.
Investing with trust, rather than emotions
Fundamentally, the key to combatting this emotional investing is trusting your investments and investment strategy. An investment strategy is predicated on an individual’s investment goals and objectives, as well as their risk appetite. Building a good investment strategy, with a diversified portfolio, can mitigate the impact of short-term shocks in the market.
For example, one of the strategies that investors can adopt would be the strategy of dollar-cost averaging, which is investing the same amount of money in a particular stock or stocks on a regular basis, regardless of the share price.
We also advocate for investors to incorporate a variety of different asset types into their portfolios so that the performance of one asset or asset class does not affect the entire portfolio. Diversification also allows investors to combine assets of different risk levels into their portfolio, to safeguard against any sudden shocks in the market.
Overall, it is important to invest in products that cover these rewards, as well as to understand the associated risks, so that an investor is not taken by surprise by market turbulence.
Employing technology to make better decisions
Part of the strategy for building a solid portfolio is to partner with a financial brokerage that you can trust. It is important for brokerages to continue to evolve, by keeping up-to-date with the latest developments in Fintech, AI and Big Data, to optimise the best solutions for their clients.
At PhillipCapital, we have made it a part of our ethos to look at how technological advancements in our industry can help enable us to serve our clients better. However, it is also important that brokerages continue to maintain the human touch, so as to provide ample reassurance and build trust with their clients. This trust can help clients when they have doubts about their investments.
Our objective is to build a relationship with our clients and work with them on their investment journeys, through a hi-tech, hi-touch approach. A fundamental part of this relationship relies on aligning our clients’ needs with our capabilities.
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Beyond stockbroking, we are an integrated financial house with a comprehensive suite of financial products and services including unit trusts, contracts for difference, exchange-traded funds, fund management, managed accounts, insurance planning, regular savings plan, and investment research, equity financing and property consultancy.
We take the time and effort to understand our clients’ needs, so as to build tailor-made investment strategies with their financial objectives and risk appetite in mind.
In recent times, we have also seen the growth of robo services which are digital platforms that provide algorithm-driven financial planning services that automate the process of allocating, managing, and optimising assets based on a customer’s investment strategy.
For example, PhillipCapital’s SMART Portfolio is a robo investment service that matches a best-fit portfolio based on clients’ risk analysis. The SMART Portfolio epitomises our hi-tech, hi-touch approach.
Employing a unique Cyborg methodology and periodic portfolio rebalancing in managing portfolios, SMART Portfolio invests in Unit Trusts across geographic regions, thematic sectors, and asset classes.
Cyborg methodology is a proprietary algorithm built in-house by the Principal Data Scientist to digest more than 1000 data points daily, at a breadth and depth that cannot be simply interpreted at a human level, picking up on robust and actionable signals. The information guides our Chief Investment Officer and Investment Team to select funds to form diversified portfolios for our clients.
Technological advancements enable us to innovate and develop solutions, like the SMART Portfolio, to serve our clients more efficiently and effectively. We can stay on the pulse of the market developments, and employ our knowledge and experience, to make the right decisions at the right time. It also allows us to give clients more reassurance on their portfolios.
Riding the wave of emotions
Investing based on emotions is not a new phenomenon, but an effervescent concern that bubbles to the surface with the markets’ rising and falling tides. In this, investors will need to ride the turbulence and the waves, stick to their investment strategy, and remember their investment objectives and goals.
One of the best ways for clients to avoid emotional investing is to build an investment strategy with a financial house they trust. Financial consultants, robo services, and financial institutions in general, function to not only make discerning decisions on investments but to alleviate the stress and anxiety of clients, by guiding them along in their investment journeys.
As I always tell my dealers and traders, “Keep calm when investing.”
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