There is no doubt it has been a bumpy year for share markets, with much of the uncertainty relating to inflation and interest rates which can be challenging to predict at the best of times.

The global financial crisis and ongoing uncertain investment environment continue to change the economic landscape, and consequently the behaviour of investors and consumers alike.

So, what are the main drivers behind investment decisions? Is it simply a case of risk versus return?

This would suggest that all investors are privy to the same information, never make mistakes and that market participants are rational and efficient, which could not be further from reality. When it comes to money, finance and investing, we’re not always as rational as we may think we are.

There are many factors that impact investor behaviour including economic, cognitive, psychological, and sociological influences and behavioural biases. Investors generally learn from their decisions based on past experiences but, unfortunately, some investors continue to repeat past mistakes.

This leads to the heart of the value proposition for financial advisers, to help clients make better investment decisions, and protect, support, and manage the expectations of their clients during both challenging and abundant times.

What is the risk versus return trade-off?

Essentially, potential returns rise when an investor increases risk and, vice versa, low levels of risk are associated with lower returns. The risk-return trade-off factors elements, including an investor’s risk tolerance, years to retirement and investment time-frame also play an essential role.

Investors can be their own worst enemy when attempting to outsmart markets, which doesn’t always pay off over the long term. In most cases this can result in unpredictable or irrational behaviour, and a dent in overall wealth. Implementing a considered and well thought out financial strategy, which aligns with an investor’s goals and objectives and relevant risk profile, and adhering to it, may help avoid many common investing mistakes.

Authored by Leanne Rowley. This article first appeared in the Spring 2022 issue of HLB Mann Judd Perth’s Client Alert.

Leanne Rowley (ASIC No. 223142) and HLB Wealth Pty Ltd (ASIC No. 428645) are Authorised Representatives of Paragem Pty Ltd ABN 16 108 571 875, AFSL 297276

Disclaimer: The information contained in this article has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned in this article, consult your financial advisor to consider whether that is appropriate having regard to your personal objectives, financial situation and needs.