BDFM Investment Dialogue hears how pandemic has highlighted the need for people to take charge of their finances and plan for the future.

The financial uncertainty brought about by the Covid-19 pandemic highlights the need for people to take charge of their finances and plan for the future. However, making investment decisions based on emotions — particularly during unpredictable, uncertain and volatile times — can be fraught with pitfalls.

A recent Business Day/Financial Mail Investment Dialogue, in partnership with the JSE, put the spotlight on exchange-traded funds (ETFs) and the benefits that professional financial advice can deliver.

Conversations of this nature are important given the plethora of financial information now available, said Itumeleng Monale, COO of the JSE, during her welcome address.

The psychology behind investing — or behavioural finance — is aligned with one of the key initiatives that the JSE is now pursuing, she explained, adding that it aims to help grow the retail investor market.

Behavioural finance applies findings in cognitive psychology to investor behaviour to identify missteps. It also describes why investors behave irrationally in the face of uncertainty.

There are more than 150 potential biases that investors can display, said Robert van Eyden, CEO of FNB Stockbroking & Portfolio Management and the author of Investing Happiness. His book describes how human emotions usually get in the way of successful investing and how financial markets are at times unpredictable and irrational.

The book goes on to explain how, by getting a better understanding of our emotions, which are in turn driven by our biases, long-term investing success on the stock market can be achieved by following an automatic investment strategy and eliminating emotional biases.

ETFs are listed, typically index-tracking unit trusts. Highly regulated, secure, low cost and low risk, they take all the emotion and inherent investor bias out of investing. However, while most ETFs track an index, not all do, explained Nerina Visser, director and co-owner of etfSA.

Describing ETFs as efficient, transparent and flexible investment opportunities, Visser said there was no limit to how much you could invest in an ETF. Neither do they lock you in for a defined period of time — they can be sold at any time.

The JSE offers ETFs across a multitude of sectors and assets classes, including 53 equity-based ETFs — of which 28 are local and 25 are international — as well as ETFs in bonds, property and commodities.

However, the sheer scale of choice can make deciding which ETF to invest in paralysing for some investors, said Wehmeyer Ferreira, COO of Stanlib Index Investments.

ETFs and exchange-traded notes (ETNs), he explained, are similar products in that they are both designed to track an underlying asset and provide similar returns. An ETF, however, is an investment in a fund that holds the asset whose performance it tracks. An ETN, on the other hand, is an unsecured debt note issued by an institution, usually a bank.

To watch the full discussion, click here