According to a study, the average investor holds too much cash

The average investor could retire two and a half years earlier if they pursue a moderate standard of living in retirement by avoiding holding too much cash and not making investment decisions based on “emotional comfort,” according to a study.

Oxford Risk estimates that investors lose an average of 1.5% each year if they hold too much cash, and 3% overall if this is coupled with emotional errors in the use of their invested assets.

His analysis shows that this level of emotional comfort equates to a loss of around £1,600 a year for the average investor, or up to £76,000 over 30 years, highlighting the huge cost to them of relying on emotional comfort Cost of return concentrated.

According to the Pensions and Lifetime Savings Association (PLSA), the average person needs £14,400 a year for a minimum standard of living in retirement – defined as having all needs covered and some money left over for fun. If the average investor could increase their retirement savings by a total of £76,000, they could potentially retire more than five years earlier if they were happy with that standard of living.

To have a moderate standard of living in retirement, people need an annual income of £31,300, according to the PLSA, and increasing your retirement savings by £76,000 could potentially see you retire around 29 months early. The PLSA estimates you’ll need £43,100 a year to retire comfortably, and with an extra £76,000 saved you could retire up to 19 months early.

The pursuit of emotional comfort in investing leads to mistakes such as focusing on well-known and domestic assets of well-known companies, pursuing current and popular investment themes, chasing star fund managers, focusing on past performance, over-trading, and insufficient rebalancing for one effective diversification. and seeking income or returns above total return.

According to Oxford Risk, asset managers need to focus on behavioral alpha to help investors avoid losses caused by poor and emotionally driven financial decisions.

Understanding and managing the emotions that influence investment decisions can help asset managers increase their clients’ returns and deliver behavioral alpha, but the industry needs technology to deliver personalized behavioral engagement at scale, argues Oxford Risk in a newly published white paper.

The white paper, “Behavioral Engagement Technology: Using technology to understand, map, and improve engagement in personal finance,” describes how using AI and machine learning to engage investors can improve financial results and increase assets under management by 10% or more for advisors can increase.

Dr. Greg Davies, head of behavioral finance at Oxford Risk, said: “Investors are human and regularly make costly mistakes, such as not investing too much money and doing poorly with what they have invested.” Changing investment behavior can help people retire earlier.

“People are sticking with cash because it feels safe at this point. They take on more risk when times are good and reduce risk when markets fall. Buying high and selling low, and systematically below-average buy-and-hold returns.

“This emotional comfort costs an average of 3% each year, which, based on the typical savings and investments of £53,000 held by ordinary investors, results in significant losses each year and over the life of the investment.”

“Behavioral alpha does not require beating the market, but simply managing it better and overcoming some of the emotional and behavioral barriers that investors face in managing their portfolios.”

According to Oxford Risk, technology can help wealth managers personalize customer engagement to enable better financial decision making.

Effective investor engagement helps investors feel emotionally comfortable making the most financially optimal decision and can dramatically reduce the estimated 3% per year cost to investors. In addition, these greenfield assets are ready for asset managers and advisors to take under their management to increase the value of the client portfolio.

Well-designed personalized digital customer loyalty systems can lead to better behavior. They can help investors and financial institutions by encouraging greater use of cash in markets, guiding and initiating better rebalancing and cash withdrawal strategies, enabling effective tax localization and leveraging better, more diversified portfolio monitoring.

Behavioral Engagement Technology uses extensive data about both an investor’s financial situation and their financial personality to weight possible message recipes. Using AI and machine learning, messages are delivered to those investors most likely to respond.

Oxford Risk’s website provides guides for financial advisors and wealth managers on how companies can use technology and behavioral science to more efficiently tailor their services while communicating more effectively with customers.

The company, which develops software to help wealth managers and other financial services firms support their customers in making the best financial decisions in the face of complexity, uncertainty and behavioral biases, has developed proprietary algorithms that evaluate products, communications and interventions for their suitability for each customer at a specific point in time.