“Sensible retirement planning” series In the long term, only a good strategy works

Investing your 3a retirement savings in securities with a long investment horizon will offer you the best potential returns. However, this decision by itself is not enough: there are eight behavioral tendencies which could lead you to doubt your decision or to make a bad investment. This article in our “Sensible retirement planning” series looks at what these are and how to deal with them.

After deciding to invest in securities, the next hurdle is to follow through on your decision. One obstacle to this can be a tendency to view events in isolation and to react to extreme movements on the market – often too late – instead of sticking with a long-term plan. Behavioral economists call this tendency “narrow framing bias.” Investors often give short-term gains more weighting than long-term ones, which makes it difficult to stick to a chosen strategy.

Tip: It's a good idea not to check your retirement portfolio too often. Once a year is usually sufficient to assess whether your chosen investment strategy is still the right one or whether it needs to be adjusted.

Inexperienced investors fear that stock prices will fall immediately after they invest or that the biggest jump in prices has already taken place. Focusing on a previous all-time high or a historic initial price level is what economists call “anchoring bias.” This behavior is also connected with regret aversion bias, as people are likely to avoid making a decision whose outcome they might later regret. However, analyses show that perfect timing is seldom possible and that holding out for the prefect moment tends to lead to missed opportunities.

Tip: Invest with a standing order. By doing so, you will average out the price at which you buy stock – sometimes higher, sometimes lower – and don’t need to worry about the ideal moment to invest.

There is another trap known as the “clustering illusion”: This is when someone tries to apply successful patterns from the past to the future. It often leads to limiting yourself too much to specific securities and to taking too much risk. Today’s low-interest environment is a good example of how changes can occur that almost no one predicted.

A known behavioral tendency is the preference for the home market (“home bias”). This is based on the belief that an investor knows the local market better. This in turn is related to ”availability bias,” when an investor assumes that they know local companies and their offers better than those which are further afield. In reality, both forms of bias rarely hold true and should not influence your investment strategy.

Tip: Ensure that your investments are properly diversified, including geographically. Get expert advice to broaden your perspective and add other sources of value to your portfolio.

The disposition effect prevents investors from selling stocks with above-average returns and from handling losses the right way. 

Tip: For investments outside pillar 3a, check annually whether rebalancing is necessary to return your portfolio to its original component ratio. You should reduce your holdings of assets that have risen strongly in value and increase the number of those whose value has fallen. In a pillar 3a retirement account, your UBS fund manager can make these adjustments for you.

According to the “default effect,” you would cash in all your pension investments the day after you retire. But this could lead to you selling them at the wrong time.

Tip: Selling your investments gradually will improve your chances of success. You can close your pillar 3a accounts up to five years before you retire. Ideally you will have split your voluntary retirement savings between several accounts that you then close in different years. Be sure to keep a large portion of your assets invested after retirement by only cashing in the proportion of your investments that you need. This will reduce the risk of selling too many investments at an unfavorable moment.