How to manage investor behaviour
It is becoming increasingly difficult to manage investor behaviour especially in recent years as the stock market has quietened, with investors backing off and often distrusting their fund managers. Observations on behaviour vary with examples such as the Wall Street Journal mentioning that investors are ‘unnervingly calm’ and the Globe and Mail saying they have disappeared and ‘don’t want to play.’
With recent investor behaviour in mind, I’ve compiled a list on how to handle investor behaviour after reading an article by Dominic McCormick on Money Management.
How to manage investor behaviour:
- Advise that crowd choice is not always sensible
Examples such as the tech bubble burst demonstrate that this may not be the best idea
- Discourage chasing recent good performance and encourage chasing future performers
Although costly, this will hopefully pay off in the long term for both investor and manager
- ETFs are useful but not risk free
These are NOT risk free and investors can lose money here
- Better education
Investors may always need a better education on investing with the introduction of new investors and the constant changing nature of the business
- Provide an understanding of WHY things do or do not perform well
Linking back to the previous point, that investors need more information on why there is good performance or not
Despite all this, if there wasn’t such irrational investor behaviour going on there would be fewer opportunities for good asset allocators, fund selectors and active managers themselves. So what’s the answer here? Managers must accept the behaviour as part of the role and industry in question. Perhaps avoid attempt to control the behaviour too urgently…just let them carry on as they are? It is what it is, right? Let us know what you think by leaving a comment below.
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