Investors have never had it so good. We have unprecedented choice, improved transparency and easy access to valuable information. All this with ever-decreasing fees. Yet to believe that these are halcyon days ignores the behavioural reality. Many of the benefits that investors now enjoy come with significant behavioural costs that threaten to turn the best of times into the worst of times.
Let’s begin by looking at the main areas where investors now seem unequivocally better off:
Cost: The cost of investing in simple funds and strategies aligned to our long-term objectives continues to fall.
Control: Improved technology means that we can now select and change our investments at will. No longer are we condemned to persist with unsuitable holdings or thwarted by a quagmire of unfathomable paperwork.
Transparency: We can see exactly what is happening in our portfolios whenever and wherever we wish.
Choice: There is easy access to the full gamut of investment strategies, no matter what our requirements or preferences.
Information: Many high-quality investment insights are freely available.
So far, so good. Yet if we consider the same categories through a behavioural lens, a different picture emerges:
Cost: How can low costs be bad for investors? When they are used as a tool to lure us into activities that we should never engage in. Commission free or low cost trading in individual stocks, FX and even esoteric options comes at a punitively high cost for investors not simply because of the spreads, but the losses we will register with grim inevitability. There are scores of studies looking at the poor results of individual investors trading in such a fashion. Even the adverts for companies providing these services tell us just how bad we are in the small print.
Low costs here are not a benefit, just a hook to turn us into committed, unsuccessful gamblers.
Control: Closely aligned with transparency is the purported benefit of control. We don’t only see our investments each day, we can trade them too. Unfettered control means there is no protection against poor system one or hot state decisions. We make choices that make us feel better in the moment but come with a heavy long-term cost.
From a behavioural perspective, the combination of transparency and control can be toxic.
Transparency: It is difficult to argue that better transparency is a negative for investors, of course it is not. We must, however, be aware of the behavioural implications of improved visibility. The more frequently we observe our investments, the more likely we are to be captured by myopic loss aversion. Where our struggle to cope with short-term losses provokes poor decisions.
It is hard to think of a greater impediment to good long-term outcomes than being able to check our portfolios every day.
Choice: The vast array of choice available to investors is a curse rather than a blessing. Not only will we be confused by the complexity of options, but we will also never be satisfied. The paradox of choice means that we will be constantly frustrated by our failure to select the best option.
Too much choice can easily lead us to feeling confused and unhappy.
Information: We certainly have access to good quality information and guidance, but investors must also suffer a torrent of misinformation and noise. From financial news channels counting down the seconds to each day’s market to open, to trading experts on Twitter (selectively) highlighting their otherworldly acumen; the weight of unhelpful information vastly outweighs that which is sensible. Brandolini’s law that “the amount of energy needed to refute bullshit is an order of magnitude bigger than is needed to produce it’, certainly applies to the investment information now easily available to us.
The problem of noise and misinformation is exacerbated by the fact that good investment guidance is boring, and the nonsense often far more interesting.
I often wonder who is better off. An unengaged investor who owns an underwhelming and unduly expensive active global equity fund in their pension but leaves it untouched over the years; or a fully engaged investor who assiduously checks their portfolio and trades actively. Whilst neither is ideal, the first investor will probably have superior outcomes because their ignorance insulates them from many of the sternest behavioural challenges we face.
It is far too easy to ignore or understate the true consequences and costs of poor investment behaviour.
So, is now the best or worst time to be an investor? Probably both. Like never before, investors have the opportunity to make simple and sensible decisions that deliver on their long-term goals. Yet this ignores the stark behavioural realities that we face. From a behavioural perspective it has never been more difficult to make good investment decisions, and unless we attempt to manage this it might really be the worst time to be an investor.