Is it possible to break the cycle where investors invest at the top of the market and not at the bottom?
The principal reasons for the tendency of private investors to invest at the top of the market rather than the bottom are a combination of confidence, self-fulfilling prophecy and weight of promotion.
When consumers see that prices have risen substantially, they feel more inclined to invest, in the expectation that what happened last year will be repeated this year.
This confidence leads to more and more investors buying into the market, with the result that prices do indeed rise over the short term. This behaviour is further fuelled by the weight of promotional activity that increases as the bull market progresses.
If the cycle is ever going to be broken, the solutions lie in consumer education, regular savings and more sophisticated promotional strategies on the part of asset managers.
Consumer education in the classroom and in the workplace is essential to communicate the dangers of investing for the wrong reasons such as fear of missing out on an opportunity or greed by trying to double up on a winning investment.
People are generally sophisticated enough to know that if you bet on the winning number at roulette, you might leave your stake on the table for the next turn of the wheel but you do not, absolutely not, leave your winnings there too. They also know that, in theory, you should leave the casino at that point and enjoy your good fortune. Of course, that is easier said than done but it is not too hard to understand, is it?
It is also not difficult to communicate the basic principles of investment. Don't put all your eggs in one basket, understand the possible risks as well as the potential rewards and so on. From every perspective, regular savings offers advantages to the majority of consumers and to asset managers, too.
Regular savings, of course, offer no guarantee of better returns than lump-sum investment but they do achieve returns at a better risk/reward ratio. There is no doubt about the sleep-at-night factor.
Regular savings removes market-timing decisions from the investor and their advisers. Experience would tell me that this is nearly always a good thing. Even professional asset managers sometimes have difficulty calling market turns.
The third factor that could do with a change is the advertising strategy of the product providers.
Investors give us their money because they want to make a better return than they would expect to receive from other investments.
They know (or at least they should know) that there are no guarantees but they are faced with the highest volume of persuasion either at the top of bull markets or at a completely arbitrary time of year, the Isa season.
It is a fact that the time at which the industry has the lowest probability of delivering on its consumer proposition is at the top of a bull market and the moment at which we have the greatest probability of delivering is at the bottom of a bear market. Now, I know that these precise moments do not have bells and whistles sounding to alert us to their presence but we do have a reasonable idea as to where we stand in relation to medium-term market trends.
So, how responsible is it to advertise hell for leather at the top of the market and to batten down the hatches at the bottom?
Cottage industries promote themselves in this way but it does not make sense as a longterm business model for a multi-billion-pound industry. Indeed, in more mature industries, bigger players often increase their marketing spend in a downturn in order to win market share from weaker competitors.
The right way forward for asset managers is to support consumer education, promote regular savings that will give them a constant source of inflows throughout the cycle and to adopt a consistent app-roach to advertising.
In this way, consumers could indeed be weaned off the dangerous habit of investing at the top.
Daniel Godfrey is director general of the AITC