November 1, 2015

Pain or pleasure for Aussie investors?

Do investors care more about their portfolio in good times or bad times?

With equity markets across the globe gyrating close to their highs, many investors are looking at their portfolios and asking whether their positioning is appropriate.
This raises an interesting question – do investors care more about their portfolio in good times or bad times?
To answer this question, Finfeed has devised a straightforward way to compare how often investors search for the term Australian Stock Exchange (‘ASX’) with actual ASX price data.

Here’s what we found:

Our findings show that on a broad basis, investors are more interested in searching for ‘ASX’ when market prices are falling. In other words, on average, Australians are more interested in the stock market when prices are falling compared to when it is rising.
From the chart above, significantly visible spikes in ASX search frequency occurred in late 2008 (GFC), 2011 (Greek crisis) and just recently in 2015 when the ASX fell around 15% from its all-time peak of 6000.
The conclusion is clear – investors do more research into the stock market when it is falling. When stocks are broadly rising, investors are less likely to search for anything ‘ASX’-related on Google.
Our analysis is by no means scientific; but it does provide several interesting insights into the psychology of investors (and traders).
In trading, there is a famous saying: “Markets go up the stairs, and down in an elevator”, which could partially explain the chart above.
If stocks are more prone to 5%+ declines than they are to 5%+ rises, it would make sense that investors are more worried about losing more than they expected, as opposed to being happy earning more than they first thought.
It would seem the fear of losing outweighs the joy of winning when it comes to investor portfolios in Australia.

Looking deeper

There are several factors that could help explain this negative correlation between the ASX Index and how often people search for ‘ASX’.
For one, when markets are falling substantially, they often garner hard-hitting headlines, fear-mongering and paranoia, often fostered by the media in an attempt to sensationalise financial markets.
Next, is the rather unfortunate reality that many investors still consider stock markets (as well as other asset classes such as property) to be perpetually growing in value regardless of any other factors.
Despite widespread calls from regulators – and advice from financial advisers calling for investors to be aware of both the upward and downward trajectories that all investments can take – millions of investors continue to invest their capital in blue-chip stocks they believe to be untouchable and forget about the need to monitor and reappraise investment decisions on a regular basis (regardless of price fluctuations, whether they be up or down).
If this is indeed the approach being taken by a large portion of retail investors, it would help explain why people jump on Google to search for ‘ASX’ as soon they see media reports of drastic declines. And conversely, forget all about the ASX when their superannuation fund is ticking over as they always thought it would.
With the recent market turmoil created by uncertain monetary policy in the US, an economic slowdown in China and ongoing fiscal malaise in the Euro zone, there are clearly many risks to all stock markets in the developing world.
Market volatility (with steep declines) is something that cannot be avoided or ignored.
With this in mind, investors should be aware that markets of all types go through cycles and therefore, analysing and keeping abreast of developments is just as important in good times as it is in the bad.

First published by
Written by George Tchetvertakov