In the third episode of a six-part podcast series entitled “Emotions and Money”, Maya chats with Paul Nixon, head of behavioural finance at Momentum Investments, about the key behaviours that make a successful investor. They also look at the impact Covid has had on how we invest.

During the Covid-19 pandemic, research conducted by Momentum Investments showed that clients destroyed over R600 million by switching between different funds. We call this a “behaviour tax”. The market turbulence trap often catches investors off guard as they trade off short-term emotional comfort (acting and switching to safety) for long-term investment returns.

But loss aversion is not the only source of the behaviour tax. In 2022 we saw that investors who increased risk levels in their portfolios (based on past performance) were heavily penalised with a behaviour tax of 4.5%.

These investors were attracted by property funds (for example) that recovered from the Covid-19 pandemic with some delivering investment returns of over 50% in 2021. Attracted to this high return, investors bought into property stocks late in 2021 or early in 2022 only to see a major pull-back in property share prices. This overconfidence in the past repeating itself was the primary cause of the behaviour tax in 2022.

So what should you do if you want to be a successful investor? Is the world of investing just too complex? The answer is that it doesn’t have to be. Our inherent personality affects our money behaviour but there are some basic rules we can follow to dramatically increase our odds of being successful.

Basic rules to be a successful investor

Get your money to work

Don’t keep your money under your mattress (or indeed in your couch). Don’t worry about the right time to invest. The best time to invest was yesterday, the second-best time is today. Time (compound interest) is by far your biggest asset in the investment game.

Psychology of Money author Morgan Housel reveals how many of Warren Buffet’s billions, since he retired, are simply because of compound interest, and the answer might shock you.

Don’t put all your eggs in one basket

Don’t get caught up in the hype of spotting investment unicorns or whether cryptocurrency is about to implode or explode into the stratosphere. Nobody is capable of predicting “the next big thing” and trying to do so is closer to speculating or gambling than it is to investing.

Choose a good mix of investments (stocks, bonds and cash) that align with your investment goals AFTER you have put an emergency fund in place to deal with the unexpected challenges that life will invariably throw at you.

Leave it alone!

We all remember the adage, “It’s not about timing the market, but time in the market” and investing for the “long-run” being a sensible strategy. But long is getting longer. Since 2013 stock markets in South Africa have not given the double-digit returns of the past and what used to be a reasonable timeframe to invest in share markets to get a positive return (5-7 years) has lengthened to over 12 years because of these recent times.

Avoiding the behaviour tax is as simple and as difficult as ignoring both the ups and downs of the investment journey.

Following these basic rules and allowing time to work its magic can provide some powerful impetus to long-term wealth creation. Sometimes something as simple as being forced to sell stocks because of a family emergency when markets are down makes a dramatic difference later on in life.

Emotions and Money is a six-part podcast series in partnership with Momentum Investments, in which we unpack the psychology behind our investment decisions and how our emotions could be sabotaging our financial outcomes.