Optimists have a tendency to hail the notion of boundlessness as well as the absence of limits. Unfortunately in reality, constraints and limits do exist – sometimes this is good and other times less so.

For investors, limits can manifest in many ways – risk tolerance, stop-loss, investment knowledge.

In a previous article we introduced the idea of hysteresis – an economic notion for when things don’t return to normal after a shock – and something that investors are grappling with today given the investment environment is anything but normal.

However, taking this further and overlaying with some limitation factors – in some cases debilitating – if we combine the abnormal market environment (financial repression, sovereign indebtedness etc.) with the concept of bounded rationality then one starts to appreciate just how hard things have become ‘poor old’ investors who are simply seeking modest risk-adjusted net of inflation returns.

Bounded rationality is the idea that in decision-making, the rationality of individuals is limited by three things

  • The information they have access to
  • The cognitive limitations of their minds (to process information and make sense therein), and;
  • The finite amount of time (including perceived) they have in which to make a decision.

The trouble is in today’s market investor s are compelled to make decisions, while goalposts are constantly shifting, there is too much information to process, and, the perceived speed that people feel they need to make decisions is increasing.

Investors are living in a state of make-do, with no solid base underpinning which direction they go. There are fewer ‘givens’ these days – more uncertainty.

Unfortunately, people still need to make decisions and plan long-term for retirement, and this is in a world where the individual is increasingly responsible for these future outcomes and corporate and government responsibility is reducing.

So how can the industry reduce zig-zagging for investors in an environment akin to playing snakes and ladders, twister and mousetrap …  not to mention compounded by the multitudes of investor behavioural blind-spots.

Fear as we know is a powerful emotion.

Look at the rise of populist politics. It’s easier to be negative than positive, easier to break something than create something.

So how do we protect and boost participation?

Guaranteed products? Hard to do in a low yield environment?

Income? Hard to deliver consistently when Blue-Chips are slashing dividends?

Derivatives? Clipping the peaks and troughs? Perhaps… but invariably expensive? And in an environment where cost to alpha ratios are being scrutinised more and more, makes it difficult to incorporate… not to mention challenging for financial advisors to explain to clients.

We’re seeing fewer fund launches these days and increasing consolidation as big groups seek asset grabs to drive up efficiency against the backdrop of margin squeeze.

Given there is clearly a deep need for guidance (true robo is still quite a few years away!), the big challenge is how to package solutions and where to find the sweet spot considering the many constraints in the market.