Behavioural finance experts, Oxford Risk says many investors have increased their allocation to cash during the Covid-19 pandemic for ‘emotional comfort’, by doing so they have missed out on returns of 3% or more a year.

In addition, it estimates that the cost of the ‘Behaviour Gap’ – losses due to timing decisions caused by investing more money when times are good for stock markets and less when they are not – i.e. buy high and sell low – is on average around 1.5% to 2% a year over time.

Oxford Risk builds software to help wealth managers and other financial services companies assist their clients in making the best financial decisions in the face of complexity, uncertainty, and behavioural biases.

However, it says that many wealth managers and financial advisers are poorly equipped to help clients deal with the emotional and psychological roller-coaster ride their clients have endured during the Covid-19 crisis, and the impact it has had on markets and their investments.

Greg B Davies, head of behavioural finance at Oxford Risk said in a statement: “The suitability processes of many wealth management businesses are typically too human heavy, inefficient, and front loaded to the beginning of the client relationship to keep up with rapidly changing client circumstances at scale during a crisis.

“Understanding of client financial personality is typically limited to risk profiling – often badly – and subjective human assessment. Very few wealth management propositions are using the sort of objective, science-based measures that are needed to provide a comprehensive picture of their clients. There is too much guesswork and not enough technology.”

The firm says there are behaviours that are common to many investors at such volatile and uncertain times. During a crisis, investors are likely to focus too much on the present and on the detail, feeling compelled to do something even when sitting tight is the best solution. They can gravitate towards the familiar – often leading to underinvestment, selling low, or decreased diversification.

Marcus Quierin, CEO at Oxford Risk said: “Retail investors should avoid watching the markets day-to-day as this will only increase anxiety to no useful end, and make you feel like you should be doing something, without any useful guidance to what that should be. Long-term plans should be looked at through long-term lenses.

“Finally, investors should focus on what they can control. It’s the most ancient advice there is, and still the most important. You can’t move the market or predict when it’s at the ‘bottom’ or the ‘top’. You can postpone discretionary spending and use tumultuous times as an opportunity to take stock of your long-term financial plans. And you can control the opportunity to benefit from the ‘risk premium’ – the long-term reward for owning shares that has eventually weathered every short-term storm yet.”

Further reading

Market crisis opens paths to higher income

Where does cancelled or suspended dividends leave investors?

Two-thirds of clients say market volatility does not impact attitude to risk – Fairstone