- Personal investor behaviour - Are you behaving yourself?
- Investment news
- All that glitters
- Should you sell your gold?

Learning from experience is one of those over-used phrases which offer comfort when we have cocked up something. But when it comes to investing, does the phrase really have any credibility?

How we behave in regard to investing often defies all logic and is no doubt costing us dearly.

As Andrew Merricks, head of investments at Sussex-based IFA Skerritt Consultants points out, we humans are a strange race!

Merricks finds the behaviour of UK investors hugely frustrating. “We pile in when the market's gone up. We invest 85% in the UK just because we live here. We invest less than 10% in the emerging markets because they're risky. Finally, the regulator clamps down on dodgy borrowing at the same time that our Government, the worst self-certified case of all, borrows more and more and more!”

True enough, there is not much in the way of logic to salvage from that little scenario. But Merricks goes on to point out the dangers of predictions and forecasts that the City throws up constantly that has little in the way of substance to recommend it and does little to help investors.

"We all love a prediction. Each year we have ‘experts’ predicting where the FTSE will be at the following year end; we hear economists predicting the next quarter’s GDP figures and rate of growth; we hear them predicting when the next interest rate move will occur, and, if we’re lucky, in which direction. We hear Governments predicting their levels of borrowing and how they will balance the books to justify it. We hear predictions constantly – and they tend to be as accurate as the astrological forecasts dispensed for a fiver by Gypsy Rose Lee in her caravan on Brighton Pier."

Over recent months we have had warnings of disinflation, inflation, deflation, interest rate hikes and interest rate cuts - it is hard to keep track and who in the end is right? All the arguments seem perfectly plausible but they can’t all be on the money.

Quite frankly, no one knows for sure how events are likely to pan out in the coming months. And these are just the things that we know we don’t know.

As Merricks explains: "The most dangerous events are those that we don’t know that we don’t know about - the very events that blow torpedo holes in the most confident of forecasts."

So perhaps it is safer to restrict investment decisions to facts that we recognise as being the case at present, whilst remaining ever-vigilant to the necessity to change one’s mind as situations develop.”..

Simon Lewis, IFA with Surrey-based Partridge Muir & Warren agrees that investors should take on board the known facts and try to make logical decisions rather than make knee-jerk reactions.

“Behavioural finance is a fascinating area. The emotional side so often comes into conflict with the investment cycle – people need a bit of hand holding and reassurance. For instance in reaction to the stock markets falls in 2008/9, we had clients asking ‘can I just switch into cash or gilts?’ It may have seemed the safe option but it wasn’t the correct one. Those clients that listened to us and remained in the market have gained as a consequence.”

The benefits of investing at the bottom of the market when sentiment is at its lowest are frequently highlighted but this doesn’t meant that investors pay much attention. Nor do they shy away from investing when a stock market is soaring and arguably primed for a correction.

According to a survey of investor confidence research from the Association of Investment Companies (October 2009) 52% of active investors plan to increase their stockmarket exposure over the next few months, compared to 33% a year ago.

“Logic would suggest that those who have missed the rally would be more cautious right now wouldn’t it?” Merricks also points to the fact that 85% of all invested money in mainstream pension funds is held in UK Gilts, bonds, shares and property. As Matthew Morris of howmuchdoineedtoretire.co.uk points out, “what is the chance that the same country that you live in will be the one that produces the best returns?”

And what is even more baffling is that a third of UK investors have no exposure to emerging markets despite the majority expecting the region to be the best performing over both the medium and longer term [according to Professional Adviser}

The figures point to the fact that 45%of investors believe the developing world will outperform all other regions over the next decade yet 70% have less than 10% of their investments and pensions in emerging markets.

“This appears to be totally irrational,” Merricks says, “and can be seen to be rooted in the traditional beliefs regarding risk. Perceived wisdom states that emerging markets are high risk. But is it time to challenge this thinking?”

Certainly there are many forces behind the emerging market tailwind.

• Emerging markets represent over 80% of global population – one in every five people is Chinese
• Emerging markets have over 90% of oil and gas reserves; 70% of global coal reserves; and in excess of 60% of global deposits of copper, nickel, iron ore and bauxite.
• Emerging markets are becoming the largest consumer of commodities, driving the commodities “super-cycle”
• The external debt/GDP ratio in the UK is 400.7%, in the US 104.4%, and in Germany 127.8%. In China, India and Russia it is 10.2%, 19.8% and 29.5% respectively.
• Combined imports to Brazil, Russia, China and India during the course of 2009 are estimated to surpass the US for the first time, significantly reducing the global economy's dependency on the US consumer.

Maybe we don’t need forecasters to tell us where economies are headed. Maybe we just need to take the clues that are out there and put two and two together. Quite why we, as a nation of investors in general, cling on to the belief that the UK is somehow a safer place to invest is hard to fathom.

As Merricks concludes: "In our view it is probably more sensible to adjust our investments towards the new world order that appears to be taking shape, as patriotism when it comes to investments can often be misplaced. But then, we’re a strange race, we humans."