How investors evolve over time

Oct 31, 2023

The fundamentals of investing haven’t changed, but the way people invest has. Financial innovation, digital connectivity, social media influencers, and market access are reshaping the landscape of investment.

Here are some insights that Morningstar CEO Kunal Kapoor shared at the Morningstar Investment Conference.

  • The way investors interact with technology changes.

I remember the first time I asked my dad to buy a stock on my behalf in India. He had to pick up the phone to call a broker and pay a princely fee. We didn’t know for another 48 hours whether the trade went through. Just think how far we’ve come now.

When I first started at Morningstar, I was very keen to make my first investment immediately. I wrote a cheque and walked down LaSalle Street to the offices of Harris Associates. I opened an account of the Oakmark Select Fund, monthly investing.

Along the way life happened. Had a family. Had kids. Started to do a 529 plan. Started to get more serious about what we’re going to do in retirement.

This year, our oldest will go to college, and we’re starting to think about withdrawing from the 529 plan to fund his education. We’re going to do it all over our phones or our computers. I’m not going to be walking down any street to make that interaction happen.

Many said that older investors would not embrace technology. That’s not the case. They want both. They want to sit down with their advisers, and they want the technology right next to them.

  • What investors want to achieve in life changes.

At certain points in time, an investor may want stability. There would also be long phases of accumulation of wealth. Finally, it is navigating the art of the drawdown.

Their needs shift and change as they move through life and the number of their dependents increases or decreases, as well as their cash flow.

It’s also true, that every generation of investors changes. The latest one has access to information, new asset classes to explore, and more choices that ever before.

  • The time they enter the market affects their mindset.

All investors are influenced by the timing at which they enter and experience the market, the way they think about risk and how technology impacts their investing experience.

The geopolitical backdrop, the economy, the markets – affects how individuals view investing, and whether they start investing at all.

Look at the last two years. I think it’s very fair to say that if you entered the market in 2021, you thought you were a genius for about 12 months. I think it’s also fair to say that if you entered the market in 2022, you’re probably wondering “What have I gotten myself into?”

When you look at the global markets, 2022 was one of the toughest on record. It shook the confidence of many investors, especially ones who’re new to the markets.

That wasn’t really the case for Indian investors, though. Indian stocks were relatively insulated, with broader indices remaining flat to marginally positive in INR terms in 2022.

  • Investors face new kinds of distractions that can impede investor success.

Because of the way various digital platforms are incentivized to collect their fees, investors can get sucked into trading frequently or overread market swings.

There is a dire need for advisers to use their behavioral coaching to help clients stay cool, calm, and collected. It’s your chance to shine.

There’s a persistent gap between the returns investors actually experience and total returns that funds generate. Why? Because of factors like cash flow timing, investment costs, tax efficiency, and buying high and selling low. Too many people enter the market after good news and exit when there’s bad news. 

These are things advisors can help their clients get right. And an appropriately diversified portfolio that’s not overly heavy on stocks bought on an app really helps, too. 

Our Mind the Gap study, published in India last November, showed a nearly 3% gap in returns over a 10-year period. This gap was highest in commodities for the 3- and 5-year timeframes, but highest for the allocation asset class in the decade-long one.  

Intuitively, you would expect allocation funds to have lower gaps, since you expect lower volatility. But what we actually observe are more frequent entry and exits into allocation funds from investors, which defeats the primary purpose of a well-diversified allocation fund that serves you for the long term. In contrast, in equities, investors are largely continuing with the disciplined investment approach of SIPs. This is a great example of where you can add value! 

This gap means that investors are losing out on over time. If you invested 10 lakhs a decade ago and stayed invested, you’d have Rs 40.14 lakhs. But if you go in and out like we’re seeing investors do, you’d have Rs 29.94 lakhs. That’s a difference of Rs 10.2 lakhs! 

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