Investors yet to recover from the 2008 crash and subsequent uncertainty may be missing out on the more recent positive market developments around the world, their emotions still dictating their investing behaviour.
According to Franklin Templeton’s recent investor survey, a third (34%) of Canadian investors acknowledge that they take an emotional approach to investing and another quarter (26%) are unsure of whether they do or not.
“Canadians are still looking at equities through ‘bear market glasses’,” says Ronice Barlow, head of strategic planning & business development, Canada, Franklin Templeton Investments Corp. “The dramatic market drop of 2008 continues to stand out in investors’ minds, even as the market has climbed back up. Many investors who instinctually moved money out of equities into traditionally ‘safe’ investments a few years ago are finding that many of these strategies have been offering a marginal or negative real return because interest rates are so low.”
Read: The psychology of investing
When Canadian investors were asked if they currently view fixed-income assets, including bonds and bond mutual funds, as a safe haven for their money, 61% indicated that they do.
Also, over a third (35%) believe that fixed-income assets offer the best returns in today’s markets.
These views on fixed income may be keeping many investors on the equity market sidelines, and further from their long-term financial goals, in a period where the S&P/TSX Composite index has risen about 68% since the market bottom in March 2009, adds Barlow.
Read: Canadians are emotional investors
Here are some factors that shape investor belief and guide their investment decisions:
Availability bias: Decision-making is greatly influenced by what is personally most relevant, recent or dramatic. For investors, this can mean that the unprecedented events of the 2008 financial crisis have left a stronger impression than the 68% stock market gain.
Loss aversion: The pain of loss is generally much stronger than the reward felt from a gain. The desire to avoid market losses has driven many investors to move their money out of stocks into low-yielding cash equivalents such as money market instruments or Guaranteed Investment Certificates (GICs).
Herding: An innate tendency to follow the crowd makes it easy for investors to get caught up in “what everyone else is doing.” This can cause investors to lose sight of their long-term goals and pull their money out of equities at the wrong time or sit on the sidelines in cash while the market rises. More than half of Canadians surveyed (59%) report that they don’t pay attention to what others are doing when investing, yet the exodus from the equity markets paints a different picture.