By Christy Jesudasan
The cliff-hanger ending which immortalised Peter Collinson’s classic film, The Italian Job, remains unforgettable to those viewers forced to sit through the agonising tension of, will they or won’t they make it. Did both looters and loot make their way into the sunset unscathed?
Avoiding such cliff-hanger moments in the context of investments becomes a matter of making choices and often difficult decisions. If an investment strategy, or visibly underperforming part of a portfolio seems to be running off-course, the less risky option, albeit a tough one, is to reassess your current position and change direction.
In this scenario, the villain that trustees must face up to is procrastination. In standard economics, procrastination would neither play a part nor affect decision-making, markets would run like clockwork and decisions could be made in a timely manner. Thanks to behavioural experts though, we now know that humans are habitually biased, driven by irrational emotion and excellent at delaying difficult choices.
Dan Ariely, a professor in the field of behavioural economics tells us that procrastination is not really about putting things off, but is rather a fundamental dilemma between what’s good for us now and what’s good for us in the long term. Combined with the pressures exerted on trustees, there is understandably a reticence to take decisions without a clear understanding of any predictable outcome. However, the comfort of doing nothing in the short-term may well be outweighed by long-term negative repercussions at a portfolio level.
Studies have also shown us that by putting mechanisms and solutions in place, the pitfalls of procrastination can be avoided. One such example of this is auto-enrolment in workplace pensions – a mechanism designed to tackle human inertia and procrastination. This has been found to be by far the most effective way to attain pension scheme take up.
Of course, scheme trustees do not have the luxury of abdicating responsibility when setting investment strategy. Instead, there are other mechanisms that can be put in place to make decision-making easier. Holding investments where purpose is clear and performance easily quantifiable makes it easier to identify weakness and underperformance. Advisers can help trustees ensure that their strategy remains in line with the objectives of the original mandate taking into account return, cost and risk when assessing standalone investments. Where an investment does not fit into the scheme’s overall objectives and risk profile, the mechanism is thereby in place for a change in strategy.
Secondly, the need for communication among industry participants and a recognition of human behaviours is important. As mentioned above, it is a natural state of the human condition to procrastinate; a conflicting trait when faced with difficult decision-making. An acknowledgement of this between advisers and trustees when assessing the need for change can be central to achieving an open and honest dialogue and the productive communication needed for an effective working relationship, to face up to the challenges together and avoid those cliff-hanger moments.
At the end of the day, any journey veering off course requires a change in direction to get you to your desired destination. A pension scheme’s investment strategy is no different. A non-action may primarily seem like the most comfortable decision, but making the proactive decision to reassess strategy can reduce risk and, in the long term, keep the scheme’s original objectives on the right track.
Christy Jesudasan is client director at MN
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