How do individuals behave when they are confronted with volatility in the market? They behave according to their financial personality. For example, a person may be emotionally comfortable with volatility, while another may not be comfortable with it at all. This is among the many findings of a survey, Breaking the Mould: A Question of Personality, by Barclays Wealth in co-operation with the Economist Intelligent Unit.
The survey says that as investors react to volatility in different ways, it’s critical these days to understand financial behaviour. It also says that individuals get pre-occupied with the performance of individual investments, rather than that of their overall portfolio. Individuals examine the performance of single stocks more regularly— and more than half of the respondents monitor their portfolio on a regular or daily basis.
A focus on specific assets makes investors take decisions that makes sense for that stock, but those may not be rational for the overall portfolio. Says Satya Bansal, Chief Executive, Barclays Wealth India: “The frequency of monitoring also depends on one’s personality. Investors who are composed don’t get carried away by market volatility.” The survey also notes that in times of volatility, individuals increase their allocation to cash, but their attitude to risk still remains the same.
The investor’s mind
- Investors see volatility as an opportunity to invest more in the market.
- More than 41 per cent of individuals monitor their portfolios on a daily/weekly basis.
- Investors focus on the performance of individual instruments rather than the whole portfolio.
- About 33 per cent of Indian investors are considering investing in overseas stocks.
- Investing in property remains an attractive option for emerging markets like India.
The survey mentions that 42 per cent of respondents plan to increase their allocation to cash at such times. Experts warn that this is not the most beneficial thing in the long run.
The report also says that in times of volatility, investors seek absolute returns and many are being increasingly drawn to absolute return funds.
These funds generally aim to provide a positive return regardless of the performance of the financial markets. Investors who monitor their portfolios regularly have a stronger market return focus. In India, there aren’t too many absolute return funds, apart from a few arbitrage funds. Says Bansal: “Absolute return funds are strategic in times of volatility. May be investors can use their offshore investment limits to invest in absolute return funds.” Also, Indian investors are warming up to overseas investing.
The report says that despite a strong “home bias”, 33 per cent of investors in India are to invest in overseas stocks. As far as property goes, 48 per cent investors in India plan to increase their asset allocation and 47 per cent plan to increase it in commodities against 37 per cent from the Organisation for Economic Co-operation and Development. Property remains an attractive investment option in India, unlike in most developed markets.
Besides, Indian investors are more comfortable with private equity investing, which they understand. Says Bansal: “Since many investors have family-owned businesses, they look at private investments not as a financial investment, but as a business.” While investors react to volatility in different ways, the survey adds, investors need to be careful to avoid hasty reactions that may prove counter-productive to longterm performance.