Invest like you shop

By Steve Brice, Global Chief Investment Officer

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Wealth BuildingFixed Income & BondsInvestment StrategiesStocks, ETFs & TradingUnit Trusts & Mutual Funds

21 April 2025  I  5 mins read

The psychology of investors has always interested me. When markets fall, investors are nowhere to be seen. After a strong rally, they are everywhere. This is the reason why the vast majority of investors underperform a buy-and-hold strategy. What we should do is to turn this on its head by investing like you shop. Just like how you would purchase goods regularly, you should also make investments regularly. When things go on sale, you should consider bringing forward your purchases to take advantage of the discount on offer.

Let’s look at some research to prove the point. Morningstar conducts an annual ‘Mind the Gap’ study where they look at the difference between funds’ performance and the average investor return in the same funds. The average annual return in a fund in the 10 years to 2022 was 7.3%, but the average investor return in the same array of funds was 6.3%. This may not sound a lot, but the effect of compounding means this is sizeable. After 10 years, 7.3% turns 100 dollars into 202 dollars, whereas a 6.3% annual return leads to 184 dollars. After 20 years, the numbers are 409 and 339 dollars, respectively, highlighting a gap of 70% from the initial investment.

The other interesting finding is that the gap is different for different types of investments. The broader the allocation, the lower the gap. The gap for funds diversified across different asset classes is just 0.4%, while that for more volatile equity sector funds was 2.6%.

This difference can potentially be explained by three factors. First, a broader allocation is less volatile and therefore less likely to scare the investor into making sub-optimal decisions. Second, the broader the exposure, the more confidence you are likely to have that it will recover its losses over a reasonable timeframe. And finally, a broader allocation is more likely to be part of a well-thought-out investment plan, rather than a spur-of-the-moment, emotional investment.

Investing after drawdowns

At a more anecdotal level, Standard Chartered launched the Signature CIO Fund series in conjunction with Amundi in October 2022. This was both the best and the worst timing.

2022 was what I would describe as the second worst year for investors in the past 150 years (1931 was the worst). While there have been much worse years for global equities, very rarely have those years also seen a sharp sell-off in bond markets. For the full year of 2022, both equities and bonds were down by around 17-18%. This was caused by an inflation spike which led to dramatic monetary policy tightening and rising fears of a recession. Against this backdrop, the likelihood of attracting significant investor interest to the Signature CIO funds was close to zero.

However, as it turned out, peak pessimism was around mid-October 2022, with bonds and equities recovering strongly into the end of the year. In Q4 of 2022, global equities rose almost 10% and bonds almost 5%. This naturally lifted the performance of our fund offering.

Interestingly, after a few months of generating strong returns, investors started investing into the funds and we see this continuing to this day. This was predictable. At some of the launch events, I remember telling investors: “I know most of you have too many scars to invest in these solutions today, but in the future you will probably wish you had”.

The optimal investors’ mind frame

So where am I going with this? Well, we know we all hate to lose money. I know I do. Typically, there are two responses to losing money. First, bury your head in the sand and hope markets recover by the time you look at it next. Second, sell everything so that you no longer see red on your investment account.

From my perspective, before you make an investment, try to figure out what is the worst thing that could happen and then write down what you will do if that happens. If you have very narrow exposures, for instance stocks, cryptocurrencies or even select sectors, then you need to be aware that the potential for semi-permanent or permanent losses is high. Understanding this can help you mentally prepare ahead of time if things go wrong and then right-size your investment, hopefully protecting yourself from an emotional roller-coaster ride.

The benefits of diversification

If, on the other hand, you are looking at an allocation which is diversified across asset classes (bonds, equities, commodities, etc.) and geographies, then your approach is a lot simpler. This is where the ‘invest-like-you-shop’ analogy works. Not only are losses generally much smaller here, but they can also usually be recouped pretty quickly.

If we look at a portfolio of US assets consisting of 60% equities and 40% bonds, since 1950, one-year returns have ranged between -16% and +32%. However, over 5-year rolling periods, annual returns averaged between +1% and +20%. Over 10 years, the returns ranged from +5% to +14%. Of course, there is always the risk that this time is truly different but rolling returns for 75 years is a decent data sample.

Being armed with this knowledge simplifies your life significantly. This means you should be more confident 1) investing regularly in a diversified allocation (for instance monthly) and 2) accelerating your investments should markets experience significant weakness.

Just following this mantra will mean you are likely to outperform most of your peers and achieve your financial goals much more easily. All you need to do is ignore the negativity prevalent in markets and continue implementing your long-term investment plan. Admittedly, this is easier said than done, but history will be on your side.

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