Do you need to change your investment behaviours in 2023?

Key points

• After a rough 2022, investors will be wondering what the coming months have in store – and how best to be positioned. But it could be as simple as changing your investment habits to make more of the right calls
• Despite so much uncertainty, investors should try to avoid focusing on short-term market moves – and instead remain laser-focused on longer-term developments that are more relevant
• Doing less, rather than more, may also be a better option for the long-term investor – as well as staying calm and standing by your processes despite what markets throw at you 

While predicting how markets will perform in 2023 requires a crystal ball, forecasting how investors will behave is arguably more straightforward, as humans tend to act in fairly systematic ways that often are not in our best interests. What common behavioural traits should investors look out for this year? 

Predicting the future

Forecasting how markets will perform in 2023 requires an ability to foresee a wide variety of events, as well as how governments, companies and markets will react to them. This is incredibly difficult.

The outlook remains positive for long-term investors, despite the recent surge in inflation, hikes in interest rates and risks of a recession in leading economies.

Many of the potential risks we identified for markets last year did materialise over the course of the year. Whilst this was of course bad for portfolios, it does mean that much of the bad news is already priced in, which could limit further possible downside risk whilst improving the outlook from here.

In looking to best position themselves for the year ahead, investors may find value in considering how other investors typically behave, and reflecting on how this compares with their own investing habits. We usually behave and react to market events in fairly systematic ways. Having an appreciation for some of these traits can help us to be better prepared for them.

2022 was a challenging and unsettling year for several investors, and the reaction many will have had to the impact of events on their portfolios is understandable. However, it is important to appreciate that when examined objectively in a cold, rational state, many of the actions taken in the moment may not be optimal when viewed through the lens of achieving long-term goals.

How will investors behave in 2023?

Investors will likely spend much time this year doing the following, some of which may be best avoided:

Market events

• React to unexpected short-term market developments, most of which will make little difference to long-term returns
• Seek expert commentary on these events and their potential impact on investment portfolios, but also follow market noise that means little to long-term performance
• Declare, after the event, that unexpected events that occurred were entirely predictable

Perception of the market

• Think about ‘the market’ instead of their portfolio
• View the market as one entity, instead of as being shares in individual companies operating in different sectors and countries across the world
• Focus on companies’ share prices instead of their long-term prospects, as indicated by high rates of return on capital compared to the average company; the ability to reinvest capital; limited use of leverage; and the power to price products and services above the costs of production without affecting demand

Portfolio returns 

• Check market and portfolio performance too frequently, especially given their investment horizon
• Fear periods of underperformance
• Feel the need to act and adjust their portfolio in response to a short-term period of underperformance

Portfolio changes  

• Attempt to time the market, despite the difficulty of the exercise and lack of informational edge, as timing can only be seen to have worked, or not, in hindsight
• Want their investment managers to make portfolio changes in response to periods of poor performance
• Question the usefulness of diversified portfolios when a particular asset class is performing very well or poorly

Time to think 

• Let their own behavioural biases impair investment decision-making, perhaps becoming more myopic in their thinking in periods of extreme market volatility and price falls
• Recognise the importance of taking a step back to regain perspective during bouts of market stress, but struggle to do so when most required
• Think and talk in terms of certainties instead of in probabilities

Looking to the future 

• Extrapolate events in 2023 out into the future
• Lose sight of the fact that gradual improvements in wealth, health, productivity and technology are typically the biggest determinants of long-term returns, not short-term news flow
• Focus on short-term performance over beating inflation to protect, and grow, wealth over the long term

Focus on doing less, not more

While it can be difficult to change your behaviour, it is important to recognise that many investment behaviours can, and do, detract from portfolio performance. 

For investors who have the correct building blocks in place for strong long-term investment returns, beware of the actions listed above, some of which could impair the ability to reach those returns. 

We’ve covered actions that may be unhelpful. But how should investors prepare for 2023? From a behavioural perspective the answer is simple, doing less is more for the long-term investor. The correct building blocks need to be in place to create a portfolio that can generate the returns necessary to protect wealth from the value destruction caused by inflation, and to grow it to meet their financial goals. 

Keep it simple

This means having an asset allocation process that is based on valid assumptions about the long-term returns expected across asset classes, while being appropriate for the level of risk that an investor has the tolerance and capacity to bear. An important dimension of this portfolio allocation is having the appropriate level of diversification, both for the financial as well as behavioural benefits it confers.