South Africans dip into savings o cope with Covid-18 fallout, says study
It's really no surprise at a time when all that has counted is survival - but at least it's confirmation of something long suspected.
According to the latest Momentum Household Wellness Insights Report, dipping into savings and investment reserves was one of the top five selected coping strategies of households during lockdown. Multiple bouts of cost cutting was another.
Paul Nixon, Head of Behavioural Finance at Momentum Investments, says that the report indicates that nearly half of South African households experienced financial challenges over this period, such as a reduction in household income, or a struggle to pay debts. “This level of pressure also spills over into the savings and investment space. Negative returns on investments as a result of the tough economic landscape have created problems for the households that earn enough to save, and has resulted in more individuals accessing or changing their investments out of fear of not being able to cope,” says Nixon.
He challenges the logic of that decision-making process. “Where fear tends to make individuals switch - or even cash out - investments as soon as underperformance looms, greed often motivates investors to take an ill-advised gamble and switch to higher risk investments, lured by the possibility of higher returns.
"However, there is now evidence that investors are significantly more driven by the fear of loss than they are by the prospect of equivalent gain. They are nine times more likely to switch funds as a result of their current fund performing poorly, than they would be due to the possibility that another fund may perform exceptionally well,” says Nixon.
Nixon, along with Professor Evan Gilbert from the University of Stellenbosch's School of Business and Dirk Louw, an actuarial analyst at Transaction Capital Recoveries, studied the behaviour of 23 000 local investors over time. The result was a detailed understanding of the motivation behind our financial decisions and how this improves or derails our financial success.
“From dumping stock to panic-buying toilet paper, the Covid-19 crisis has provided the perfect example of how fear and greed tend to influence us, and challenge the logic of our decision-making process. While most of us understand the science behind long term investments, it seems that in the face of a crisis, logic goes out the window and we do things that can severely hamper our financial wellbeing,” says Nixon.
With that said, Nixon adds that times of high volatility and significant economic stress, are in fact when investors need to be the most level-headed. “Understanding why we make the decisions we do - and overriding that detrimental ‘knee-jerk’ reaction that compels us to make rash decisions - remain critical to ensuring the long-term financial health of households,” says Nixon.