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What investors can learn from their eating habits at times of market volatility

30 September 2022

A lot of the same behavioural issues humans have with dieting come to the fore when investing, according to experts.

By Jonathan Jones,

Editor, Trustnet

Dieting, much like investing, is hard. As someone who is currently trying to lose weight and grow their cash pot, neither is an easy feat. So far, I have lost the pounds in both senses, but I should apply the lessons I have learned from dieting to my ISA.

At least that is the lesson from behavioural investing expert Greg Davies who, in discussion with Aviva Investors this week, explained that keeping discipline with your money is akin to staying on a diet.

“Everyone knows the importance of a healthy diet and a regular workout. But being disciplined enough to follow that regime can be challenging,” he said.

I can attest to this, although I have opposite problems for my waistline (trying to stop it from expanding) and ISA (trying to stop it diminishing).

With food it is straightforward: you instinctively want the tastier (but most likely bad for you) option. When it comes to looking at falling investments, however, the poor choice may not be so obvious.

In this case, the “emotional comfort” of, say, sitting on cash, is akin to getting a takeaway. It is the easy choice but could be costly in the long run “because you are missing out on a potential significant level of returns, year after year”, Davies said.

Another similarity is the want to track progress constantly. Whether it be looking at the scales on a daily basis or constantly checking your portfolio, it is human nature to want to see progress.

When this is going in the wrong direction, it can be incredibly difficult to stomach. Davies said: “Once you’ve put your hard-earned money into an investment, it is a very natural human tendency to monitor it and, if you see it going down, try to do something.”

But investing should be a marathon not a sprint and DIY investors have the luxury of time on their side to weather downturns, something that is hard to remember the longer the news remains bleak.

“When markets drop, people tend to dig their heels in because they hate selling at a loss. So, they hold on and on. But as the market downturn deepens, the pain of selling at a loss grows. Eventually investors run out of emotional liquidity, and capitulate,” Davies said.

“Once you’ve sold after you’ve lost 30% of your investible wealth, it is immensely difficult to recover your poise and reinvest. So, investors also tend to miss out on most of the gains when markets rally.”

This has been particularly difficult to do this week, after Bank of England governor Andrew Bailey attempted to reassure markets on Monday that it would do what was necessary but implied the central bank would wait until the November meeting.

This was in response to a disastrous mini-Budget last week from chancellor Kwasi Kwarteng, which left experts concerned for the sustainability of the UK’s financial future.

Fast forward to Wednesday and the Bank had effectively restarted quantitative easing (albeit with a strict time limit) to get a grip on rocketing gilt yields and a plunging pound. I will not go into detail here, but Anthony Luzio has provided a simple-to-follow guide to the situation.

The reaction was mixed at best, with Tom Aylott writing that experts thought the decision was “potentially hazardous” and showed that the Bank was in panic mode.

Staying the course at a time like this is incredibly challenging, but it is important to keep our emotions away from financial decisions.

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