Outflows from investment funds in 2022 show that investors are failing to learn the lessons from previous market downturns.
- Investors sold down £25.7bn worth of funds in 2022
- UK equities were particularly weak, with £12bn worth of outflows
- This is a pattern seen over multiple cycles
As investors become more sophisticated, it is tempting to believe that they have moved on from some of the destructive wealth-destroying habits that have previously characterised financial markets. Surely by now, everyone knows that they shouldn’t sell during moments of weakness? Or that buying when stock markets are low can be a significant boost to their long-term returns?
Apparently not. Data released by the Investment Management Association this week showed that investors sold down £25.7bn worth of funds in 2022, worse than the Financial Crisis, Dotcom crash and Brexit vote. Take out tracker funds and ethical investments and the picture was even worse. UK equity funds continued their long run of unpopularity, shedding £12bn of outflows, while investors continued to be lured by North American equities, which were one of the few sectors to see net inflows.
This means that investors will have missed a relatively strong year in UK equities, with large cap equities buoyed by a strong performance from the energy companies and other defensive areas. It also means they are vulnerable to a turn in the Dollar. The strong Dollar has masked the weakness of North American equities for UK investors and flattered the income from international companies, but there are signs this is reversing.
may also be missing out on the nascent recovery in markets since the start of the year. There has been a significant bounce in some of last year’s laggards, including technology, smaller companies, China and Europe. While momentum may ebb if the hoped-for pivot on US interest rates doesn’t materialise, investors may struggle to find the ‘right’ moment to reinvest amid the prevailing volatility.
This is pattern seen over multiple cycles. Investors are spooked by falling prices, and ship out of stock markets, or pause new investment. They miss out on the pound-cost averaging advantages of reinvesting at lower levels, and only reinvest in markets when they have already recovered. No matter how many times it makes them poorer, investors repeat the same pattern in every market downturn.
Human behaviour is hard-wired. It is optimistic to hope that education alone will ever prevent investors from this wealth-destroying habit. This is where advisers come in. It may feel like bullying at the time, but advisers’ role in keeping clients invested during rocky markets is one of the most important they have.
