Covid-19 investor behaviour: Was 2020 that different after all?

_{By: Paul Nixon,
Head of Behavioural Finance at Momentum Investments}

Early February last year, the new coronavirus still appeared to many South Africans as a problem that might pass us by.

On the morning of Thursday, 5 March, a suspected case of Covid-19 tested positive in South Africa. Two weeks later, the JSE All Share Index would dip to 37 963 points. Similar levels were last seen in July 2013 but reached from the opposite direction as a new record in a raging bull market. The rest is history.

South African investors were once again faced with the four most dangerous words in investing: This time it’s different. And to be fair, 2020 looked a bit different. Where did all the toilet paper go? Snapshots of empty store shelves and bizarre reports of standoffs and aggravated assault over sanitisers and tissue paper in once peaceful neighbourhoods escalated panic-buying. Almost overnight, the transaction utility of these goods, usually in high supply, skyrocketed.

Was it different this time?

Momentum Investments did a detailed analysis of investor behaviour preceding and during the Covid-19 pandemic of 2020. Results show that as market crashes go, the investor behavioural response was all too familiar.

In 2020 there were over 11 500 investment switches of more than R1 000 each on the Momentum Wealth platform.

An investment switch represents a change in strategy – moving from the current portfolio of investments to another that often represents a trade-off of future investment returns for current emotional comfort: The flight to safety.

The average value of these switches was slightly more than R150 000. As panic set in, the number of switches in March 2020, at the time of the crash, spiked to nearly 300% compared to the number of switches in January 2020. We also clearly see a ‘risk off’ strategy for March and April as investors moved to ‘safety’, or at least they think so.

To measure the ‘behaviour tax’ of these switches, we look at the investments people moved from, what they moved to, and measure any difference in returns between these two values. The results are staggering. From an average annualised value of 0.13% of investment value destroyed per switch in March, we see an aggressive escalation to 8.9% of investment value in May to a whopping 19.44% of investment value in August. Remember, this is per investment switch.

The latent effects of this value destruction are rooted in investors rushing for safety and getting stuck in safe assets where they remain for a large portion of the inevitable market recovery. They’re in the wrong place at the right time; on the sidelines watching. The damage was severe, particularly considering that a 20% loss in investment value requires a 25% market return to get back to level pegging.

Warren Buffett is quoted as saying, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11 497.”

There is little doubt that the Covid-19 pandemic will go down as a global event and will be added to infamous lists much like the one as quoted by Buffett.

However, from an investor behaviour perspective, 2020 really wasn’t that different after all. Despite everything that we know about investor behaviour, when it comes down to the crunch, sadly, a tremendous amount of investment value was destroyed once again.

Our philosophy of outcome-based investing is about placing your clients’ personal goals at the centre of the investment process. We use our behavioural finance research and capability to help advisers and their clients to achieve their goals.

But the golden rule is simple: If your investment goals haven’t changed, your investment strategy to achieve those goals shouldn’t be changing either. When faced with a market crisis or the equally dangerous, unicorn promising returns into the stratosphere, just remember the four most dangerous words: This time it’s different. Because it’s probably not.

_{Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.}