The Momentum Investments Sci-Fi report was published at the beginning of 2022 and clearly showed that since the COVID-19 pandemic shocked South African financial markets in March 2020, investors’ incurred an average behaviour tax of 6.5% in 2020 and 3.5% in 2021. A behaviour tax is the percentage of the investor’s portfolio value destroyed by switching to another investment. Selling out of one investment fund and buying another realises this loss in rands and cents.
The pandemic has catapulted digital adoption forward by several years and, together with increased levels of household savings, this likely means that investors have greater access to information, and are much more engaged or likely to act on that information with their savings. This was echoed by the results of our Sci-Fi report in that the number of investors becoming “active” or performing at least one investment switch escalated by 80%. The number of investment switches increased by an alarming 50% to record levels in 2021.
We have published an update to this study that investigated the investor behaviour of clients in the Retirement Income Option (RIO), our living annuity. Click here to read the research paper.
The market turbulence trap that investors succumbed to stems from creating a disproportionate focus on the short term in the face of uncertainty and market volatility.
When people retire, in general, they must choose between the certainty of a life annuity and the flexibility of a living annuity. With the living annuity the client and their financial planner can balance the short-term income needs with longer term growth needs to protect against the corrosive effects of inflation. Clients are relatively engaged with financial markets simply because the growth or decline of their hard-earned life savings have a direct impact on their current and future living standards and, of course, in retirement there is less time to recover from bumps in the road along the way.
This sets a significant market turbulence trap for the client. Examining the run-up to the COVID-19 pandemic (2018 – 2020 crash), clients incurred an average behaviour tax of 0.53% per investment switch. While this is far from ideal, when asset prices are rising in normal market conditions, this provides a shield for investors with changing preferences. The investment switches executed are often to those rising in value. In South Africa, however, since the bull market ended during 2014, markets have become more volatile and less inclined to persist in one direction for an extended period, leaving investors in most subsequent years incurring a behaviour tax.
The market and other subsequent world events since the pandemic, however, have caused havoc with clients’ retirement savings. In much the same vein as discretionary savings, there was also a distinct trend of elevated client engagement. Retirement investors performed more than 50000 switches in 2021 – double the volume of switches. While this was down by 6% from the record levels experienced in 2020, it remains alarmingly high.
The total behaviour tax for all clients in living annuities for 2020 amounted to a staggering R403 million, with the dominant trend (unsurprisingly) being risk-off behaviour (switching to investments that on average have a more conservative asset class allocation). Once again, this dissipated in 2021 to just over R84 million. However, in 2021 the average behaviour tax per client was 4.22%, which is significantly higher than the average behaviour tax of 3.5% experienced in discretionary savings. Clients did not take as much risk off the table as in 2021, but the trend was still to remove risk from portfolios.
The market turbulence trap that investors succumbed to stems from creating a disproportionate focus on the short term in the face of uncertainty and market volatility. There was certainly no shortage of uncertainty over the past two years and, sadly, many clients in retirement locked in losses by shifting money to safety (evident by the risk-off behaviour) and then sitting on the side-lines and watching the market recovery. The stark reality is that nearly R500 million in value was destroyed in 2020 and 2021 as retirees battled to overcome the market turbulence trap that may have lasting effects on their standard of living.
Investing is personal, and nothing is more personal than the fear of losing money, which is often at the heart of ill-informed financial decisions. We believe in the value of financial advice and that financial advisers can play a critical role in times of distress to act as a sounding board to help clients think through their actions during market turmoil.
The Retirement Income Option is a life insurance product, underwritten by Momentum Metropolitan Life Limited, a licensed life insurer under the Insurance Act and administered by Momentum Wealth (Pty) Ltd. Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406).