Point of view: Retirees lose the most on investment value due to ‘behaviour tax’

In 2023, 65% of the R120 million of value destroyed was attributable to retired investors. Picture: Pexels.com.

In 2023, 65% of the R120 million of value destroyed was attributable to retired investors. Picture: Pexels.com.

Published Nov 26, 2023


ABOUT R120 million of the value of investment returns were destroyed due to behaviour tax for the 2023 period, according to Momentum Investments’ latest Sci-Fi Report.

According to the report titled Momentum Investments’ latest Sci-Fi Report for 2023, the behaviour tax is calculated as the performance sacrificed after switching between one unit trust and another.

Momentum Investments head of behavioural finance and editor of the Sci-Fi report Paul Nixon said the top consideration when investors switch relates to the individual’s circumstance, including their age and how much money they have invested. The more the investor has to lose, the less time they have to recover from market downturns, and the more likely they are to switch between funds.

"This does not bode well for the more vulnerable investors in retirement. Once again, investors do not manage to add value with their switching behaviour on average. Quite the opposite as behaviour tax levels rise to Covid-19 levels once more," he said.

The research revealed that since the onset of the Covid-19 pandemic early in 2020, investors have become more engaged with their investments. Switching levels, in general, are still approximately 30% higher than pre-Covid levels.

"Looking back, since the pandemic, nearly R650 million in investment value was destroyed in behaviour tax ‘paid’. An alarming 75% of this value was destroyed by retirees in the living annuity product, the Momentum Retirement Income Option, where part of the investor’s retirement capital is exposed to the market, on the Momentum Wealth platform. In 2023, 65% of the R120 million of value destroyed was once again attributable to retired investors," it said.

According to the report, there is a pattern in switching behaviour by a group called the “market timers” that often destroys the most value.

“The market timers are active by switching to not only chase higher market returns but also by switching when they run for the hills during market turbulence. In 2023, the market timers destroyed a staggering 4.79% of their portfolio value with this behaviour pattern in general," it said.

“There is a clear pattern of behaviour by the market timer. The JSE All Share Index surged towards the end of 2022 and broke records early in 2023, hurdling 80 000 points for the first time in history. Records are tough to ignore.

"Following the money, we saw a clear trend of investors chasing this market upturn. Once again, however, investors are not rewarded for chasing these returns as markets took a persistent downturn for the remainder of the year, and investors are left scrambling to get back to safety, thereby losing on both the upturn and downturn of the market,“ Nixon said.

He said in fact, the top-10 unit trusts, in terms of fund outflows - over R1 billion in value - delivered between 3% and 25% better performance in the next period.

"Investors, therefore, miss out on these significant returns in the next period, which is how the behaviour tax starts to mount," he said.