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The psychology of control

29 October 2014  |  Portfolio

ControlThere is a raft of surveys showing that DIY super funds are set up because trustees want to have greater control over what happens to them. The effect of the GFC, when super fund members found their nest egg going down in value sharply, was for many the trigger to make their own decisions.

But investing always entails some sort of loss of control. Nobody knows, or controls the direction of the stock market, something obvious enough since its creation. And with massive amounts of computerised trading muddying the waters, the control is even less. The Global Financial Crisis was a reminder of just how out of control much of what has been allowed to happen in the financial markets really is.

That creates a great deal of psychological pressure on investors. As any experienced trader will tell you, you need nerves of steel to make money if you move in and out of markets. The pressure is less when you are dealing with the long time horizons of super, but it is still there.

That is one reason diversification is so important, as the AFR points out:



"If the recent volatility on financial markets – partly based on talk about a change in the interest-rate environment – is a taste of how markets might react, cautions Sydney investment adviser Tom Murphy of Family Office Research, how actual rises will affect sentiment could result in an uncertain and uncomfortable time for those who are not prepared.

Investors who are not ready for what could happen if interest rates increase even only modestly during the first half of next year could be in for a tricky time. After 18 months to two years of incredibly benign share market conditions in 2012 and 2013, many may have been lulled into thinking it’s the norm for share prices to gently drift upwards.

Given the main attraction DIY super funds offer those who establish them is control over their investments, Murphy says this includes being in charge when times are challenging."


Two strategies are proposed in this analysis. One is timing: prudently buying when there are opportunities. The other is being patient and not over-reacting to volatility. In relation to the second, drops in prices are only a problem if you choose to sell, especially for high yielding investments:


"Murphy reckons if a market fall or uncertainty creates alarm or a feeling of panic and a desire to sell investments, it suggests an investor does not understand the risks associated with either a particular investments or investments generally.

Where an adviser or financial product promoter is involved in the investment, it could also mean they have been poorly advised or there has been poor communication or understanding about the investment risks involved.

For any serious investor responsible for their retirement portfolio, exercising control should happen during both good and more challenging times. Every time people look at their investment portfolio they should consider what they might do if particular investments fell in value by, say, 10 per cent or more or conversely increased by 10 per cent. It should be a trigger to understand why this has happened and a reason to consider adjusting any significant exposures if this creates discomfort.

Given Australian shares have performed exceptionally well up until the recent volatility – along with the hype that has surrounded property and the attention this has attracted – one thing investors should check is how concentrated their portfolios are and the potential consequences of this in the event of any adverse market activity in the months ahead."


The best way to ease the pressure is diversification, not having too much of the investments concentrated in one asset class, such as cash, property or shares. As long as the investments are spread, poor performance in one area is less of a problem:


"It’s a better overall portfolio, Roux says, if it has segments that aren’t performing as well as others, so long as the performance can’t be attributed to a poor decision or faulty investment.

Many people look at poorly performing investments, the softer parts of their portfolio, in a negative way and question whether they should change this. That might be the completely wrong strategy if the investments either performed well or held up during a time when others retreated – like the recent retreat in bank shares on interest rate worries.

An example of this, Roux says, is investments in global share funds which didn’t really make a big contribution to portfolios until the Australian dollar started to fall from about the first quarter on 2013.

These investment have worked particularly well since then whenever there have been sharp falls in the Australian dollar."





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