Investors behaving normally

Most super fund members may not realise it but the latest release of returns for the big super funds with balanced portfolios could provide a valuable lesson in behavioural finance.

Super fund researcher SuperRatings reports that the median large super fund with a balanced portfolio in the accumulation phase returned 9.7 per cent return over the 12 months to June 30. And the median fund returned an annualised 12.3 per cent over three years, 9.2 per cent over five years, 5.9 per cent over seven years (which, of course, captures the impact of the Global Financial Crisis) and 6.5 per cent over 10 years.

From the perspective of individual super fund members, these returns illustrate the benefits of regular contributions (or investments) in different market conditions, a diversified portfolio within an appropriate asset allocation, compound returns and a disciplined, long-term focus.

These returns underline the potential rewards of being a highly-disciplined investor who concentrates on achieving long-term goals and who doesn’t fall into the trap of making emotionally-driven investment decisions.

Indeed, here is a lesson in behavioural finance - whether investing through a big super fund, a self-managed fund or in your own name.

Behavioural economists tell us that among the biggest roadblocks to investment success are the investors themselves.

This is because most of us are vulnerable to making decisions driven by emotion, greed, temptation, instinct, fear, anxiety, irrationality, regret and over-confidence. The list goes on. And often procrastination stops us making decisions when we should.

In other words, we are likely to behave in a human way whether in terms of our investment decisions or other decisions affecting our lives.

The basis of behavioural finance is that investors can be expected to behave like normal people, explains Meir Statman, one of the founders of the field of behavioural finance.

Statman, who is a professor of finance at Santa Clara University in California, says in an introduction to one of his articles in The Journal of Portfolio Management in the US: "In behavioural finance, people are normal. Sometimes normal smart, sometimes normal stupid."

Behavioural economists typically tell us that investors should first recognise their human frailties and learn to mistrust their financial instincts. And then they can set effective rules to address any behavioural traits that may be determinantal to achieving their long-term goals.

As Statman says, "...normal people create rules to help them do the right thing".

In his book, What investors really want, Statman stresses that investors should set goals and then to work towards those goals in a realistic way.

Investors with a disciplined, long-term focus are less-likely to try to time the investment markets - that is, attempt to pick the best times to buy and sell. Market-timing often ends in disappointment.

And disciplined, long-term investors are less likely to be swayed by the prevailing "noise" in the markets as numerous people offer opinions about which way asset prices may next move.