Last year was a tough year for investors with sharp falls in global stock markets testing the nerve of investors. New global research shows that only 15% of Hong Kong investors said they stuck with their investment plans during the volatile three-month period at the end of 2018.
The findings were part of Schroders Global Investor Study 2019, which measured the views of more than 25,000 investors around the globe, including 500 investors from Hong Kong.
A majority (78%) of Hong Kong investors said they made some changes to their portfolio risk profile during that period. Close to a third (32%) took more risk, while the majority, 69%, moved into lower risk investments (42%) or cash (27%). Only 6% made changes to their portfolios but kept their risk profile the same. But despite the tinkering, many investors expressed frustration with how their portfolio had performed.
64% of Hong Kong investors said they have not achieved what they wanted with their investments over the past five years, and many attribute their own action or inaction as the main cause of this failure.
The uncertainty during the period in question was particularly acute. Global stocks suffered their worst quarterly fall in seven years at the end of 2018 amid global economic concerns, driven by worsening tension between the US and China. The MSCI World index fell 13.9%, the 11th worst quarterly fall since 1970.
Claire Walsh, Schroders personal finance director, says, “No-one likes to lose money so it is not surprising that when markets go down, investors feel nervous. Research has repeatedly shown that investors feel the pain of loss far more strongly than the pleasure of gains. That can affect decision-making.
“As our study shows even just three months of rocky markets led many investors to make changes to what should have been long-term investment plans. That could potentially lead them into making classic investment mistakes. These include selling at the bottom when things feel bad or moving their money into cash in an attempt to protect their wealth, but then leaving it there too long where it can be eaten away by inflation over time.
“These psychological drivers [are what] the investment industry terms as behavioural finance. Ultimately, it is difficult to predict [what] markets will do, but being more aware of the biases that might affect your decisions is a good way to help preserve your wealth,” says Walsh.
The difficulty with timing the market
The Global Investor Study findings suggest investors are attempting to time the market. Buying low and selling high is every investor’s goal. However, timing the market precisely is notoriously difficult, if not impossible.
Previous research undertaken by Schroders shows how costly it can be when the timing is wrong. For instance, if in 2003 you had invested US$1,000 in the MSCI World and left the investment alone for the next 15 years it would now be worth US$4,211.
However, if you had tried to time your entry in and out of the market during that period and missed out on the index’s 30 best days, the same investment would now be worth US$1,268, or US$2,943 less.
Hong Kong investors stay invested for an average of 2.1 years
Schroders Global Investor Study 2019 also revealed investors tend to take a relatively short-term view. On average, people in Hong Kong stay invested for 2.1 years before moving their money elsewhere or cashing in.
Just 9% of Hong Kong investors said they stayed invested for the five-year minimum often recommended by financial advisers while 50% said they stay invested for a year or less.
“Generally speaking, the longer you invest for, the longer you have to ride out any bumps along the way, which is why it is suggested you invest for a minimum five years,” says Walsh.
“It is slightly concerning that such a large proportion of investors don’t do it. People do have different investment goals like buying a house or investing for retirement. However, if your goals are truly short-term, like perhaps buying a car, then maybe saving in deposit accounts is a better option,” adds Walsh.