These clients are finding they can no longer default to their historical portfolio anchors of property, gold and cash. Instead, they need to be more rational in their asset allocation to be able to adapt to a new landscape.
Various reasons are driving this:
- Real estate has fallen out of favour among NRIs since India’s banknote demonetisation policy was put in place in late 2016. This removed from the economy a lot of extra cash that was being invested in property. Also, falling rental yields (now at around 5% to 7%) have dampened what was previously a key incentive to tie-up funds in rental property.
- The appeal of gold has gradually been eroded. Once an investment safe-haven for NRIs, the gold price has remained stable while Indian import duties introduced two years ago have made it less viable to buy this precious metal to take back to India to sell.
- The appetite among NRIs to accumulate savings in cash has reduced due to rising inflation rates.
It’s not surprising to see a growing number of NRI clients confused about what to do with their money. Yet, while diversification seems the ‘right’ answer, it remains a difficult concept for NRI clients.
Beware the behavioural pitfalls
We believe three simple, but important, approaches can help NRI advisers guide the investment behaviour of their clients towards the right direction:
1. Stay focused on a current, pre-agreed investment strategy and don’t deviate from a previously-defined risk profile.
This involves blocking out the “noise” given the excessive news and opinion that creates fear and heightened emotion (especially in falling markets).
Attempting to move in and out of the market when you hear good and bad investment news can be costly. Numerous research studies show that the decisions investors make about when to buy and sell funds cause those investors to perform worse than they would have had the investors simply bought and held the same funds. The problem is, it is impossible to consistently predict when good and bad days will happen. If you miss even a few of the best days, it can have a lingering effect on the value of your portfolio. The equity market falls in December 2018, followed by the strong rally in January and February 2019, show that often the best and worst days in markets appear close together.
This also highlights a need to spend time “in” the market, rather than try to “time” the market. If you invest regularly over months, years and decades, short-term downturns will not have much of an impact on your ultimate performance. Instead of trying to judge when to buy and sell based on market conditions, taking a disciplined approach by making investments monthly, or quarterly, will help investors avoid the perils of market timing.
2. Avoid succumbing to investment biases to which NRIs, in particular, seem prone.
One of the most common is a herd mentality, where investors are influenced by – and follow – decisions of friends and family.
This influence appears to be based on a view (often unproven) among NRIs that the individual has done their research and is confident in their view on an investment opportunity. Overconfidence is one of the most harmful behavioural traits an investor can exhibit. Equity investing, by its nature, is an act that requires patience and humility.
Overconfident investors enter a market expecting an immediate result, which the market may not produce. If the overconfident investor does not achieve the desired result, he/she may quit altogether, which is dangerous, or double-down in an effort to achieve the return that he/she feels is due. The market is not in an investor’s control, but that individual’s reaction to it is. Achieving long-term returns in the stock market is less about being gifted and taking the advice of confident friends and family, and more about being process driven.
3. Create investment goals that are clearly-defined and realistic, based on a long-term plan. This helps investors to avoid worrying about the markets, since most of the volatility will be irrelevant to the average NRI in achieving his/her objectives.
It is natural to set a benchmark against which we gauge performance. For most investors, keeping score means comparing their returns to those of an equity market benchmark. Think about that though: what has an arbitrary financial benchmark got to do with an NRI client’s future hopes, dreams and goals?
For NRI investors, their progress towards long-term goals is the benchmark, rather than an impersonal and highly-volatile index like the BSE Sensex or the NSE Nifty. Investor research (and indeed our own observations at Zurich) shows goal-based investors are more likely to stay the course during tough times, and may even save at higher rates as they are doing something that is personally meaningful.
Ultimately, in what is one of the most confusing times ever for investors globally, NRIs must remember that investing is the easy part; the hard part is controlling day-to-day behaviour. As a result, taking time to assess and make long-term decisions is the best starting point in managing any market volatility.