With speculation about what might be announced in the Budget gathering pace, what can investors do to prepare?
A new Barclays investing podcast offers insights into why taking a longer-term view can be important – and why reacting too quickly to Budget announcements isn’t always the best approach.
Alex Joshi, head of behavioural finance at Barclays, who features in the podcast, sat down with The i Paper to explain why trying to predict Budget announcements and reacting to short-term news can sometimes work against investors.
Joshi said: “I think the key thing is you just don’t know what’s coming up. In the face of that uncertainty, if you are an investor, it’s a pretty unhelpful use of time trying to pre-empt what happens and what impact it’s going to have.
“You’re trying to predict what’s going to come up, and then you’re going to try and predict the implications that that’s going to have on finances or markets, which is very difficult to do. In that heightened emotional state, lots of the behavioural biases that you may have around money investments can be exacerbated, which is very, very harmful.”
Joshi believes that while Budget announcements can affect investors differently depending on their individual circumstances, the impact on an individual’s investment portfolio may be relatively limited, particularly over the longer term.
He said: “The reality is how much of what gets presented on that day is going to be material to someone’s individual portfolio? It’s likely to be pretty minimal, and that doesn’t align with the amount of attention that it’s going to get.”
One challenge is that investors can feel compelled to act when faced with uncertainty. This is known as “action bias” – the tendency to favour doing something over doing nothing.
Instead of reacting to every development, taking a step back and reviewing your financial goals, whether that’s saving for a house deposit or helping a young person with university fees, may be more useful. Holding a diversified portfolio can also help spread risk across different investments.
Joshi told The i Paper: “You’ve got to start looking inwards before you start thinking about any implications about what’s going to be announced. What are your financial circumstances? How much have you got invested?
“It may not necessarily resonate very strongly to say a well-diversified portfolio is built to withstand this, but that’s the whole job of having a mix of assets and sectors and companies.”
The action bias problem
During periods of uncertainty, investors may feel the need to take action, such as selling investments, even when it might not be in their best interests.
Joshi said: “A lot of what people want to do is protect themselves, protect their wealth, their investments.
“It is a very natural tendency to want to do so, but not all action is necessarily going to be useful or helpful.”
Joshi compares this behaviour to a goalkeeper facing a penalty, who feels compelled to dive to one side rather than stay in the middle.
He explained: “If we think about goalkeepers saving penalties, statistically, you’re more likely to save the penalty by staying in the middle, but goalkeepers will have a bias towards diving left or right because they want to do something.”
Get Budget-ready
Watch the full Barclays investing podcast, featuring Alex Joshi’s insights into how to be Budget-ready, why action bias can affect decisions and how inflation can affect cash savings.
Visit Barclays Direct Investing to explore investing and learn more about the options available.
Similarly, for investors, taking a longer-term view can help put short-term market movements into perspective. While markets will inevitably experience ups and downs, reacting to every development isn’t necessarily the best approach.
Joshi added: “You have all the noise around the Budget – is this thing going to happen? Is it going to be good? Is it going to be bad?
“It’s a very natural tendency to want to do something. But if we zoom out and look at history, these things are part and parcel of an investment journey.”
Cash is comfortable – but don’t get too comfortable
During periods of market uncertainty, some investors may be tempted to sell their investments and hold cash instead.
Joshi explained: “The gut reaction many people have is to hold cash to feel better.”
While cash can be useful for short-term needs, inflation can mean your money buys you less in the future than it does today. And even if your savings earn interest, you could still lose out if prices are rising faster than the interest you’re earning.
Joshi said: “People think ‘Oh, I’m getting a pretty decent enough rate on my cash in the bank’, not thinking about the cost of inflation.
“That doesn’t necessarily come into your mind on a day-to-day basis. You’re not doing the calculation to convert that into a real rate, so you don’t recognise that there’s a cost to holding the cash.”
“It’s important to remember that inflation can mean your money buys you less over time. Nobody wants to lose money, and that’s one of the reasons why some people are nervous about investing.”
The Barclays investing podcast highlights that 15 million people in the UK hold more than £610bn in uninvested cash.
Joshi believes investors can sometimes focus too much on the short-term comfort of holding cash rather than their longer-term financial goals.
He said: “You need to have the composure to stay in the market, to ride out that volatility. Because yes, cash is comfortable, but actually, if you are really going to protect and also grow that wealth over time, you’ve got to have a little bit of comfort in being uncomfortable.
“The key thing is to recognise that there is a cost to holding cash. That’s my focus as a behavioural guy. We want people to make good decisions that are in line with their long-term interests.”