Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

If you experience any difficulty in accessing Forsyth Barr Focus,
please call 0800 367 227, or e-Mail for assistance.



January was the hottest month ever recorded in New Zealand, while winter in the northern hemisphere was one of the coldest and darkest on record. In Moscow, for the entire month of December, the city registered only six minutes of direct sunshine; on average, the Russian capital enjoys 18 hours of sunshine in the last month of the year.

While it was Oscar Wilde who once said that "conversation about the weather is the last refuge of the unimaginative", science is now taking a keen interest in its effect on human behaviour. One such behavioural phenomenon is Seasonal Affective Disorder, which is linked to the levels of the chemicals serotonin and dopamine in the brain; chemicals which directly influence our mood, either positively or negatively.

While Muscovites were reported to be particularly gloomy and lethargic as a result of their sunshine drought, in Finland some schools have now been fitted with ceiling lights that change in colour and intensity to simulate being outside on a bright day in spring and to stimulate increased dopamine levels. As many New Zealanders will agree as they enjoyed January’s superb golden summer, sunshine and warmth generally have had a positive impact on their feelings about their life and well-being.

Turning to the recent golden period of financial market performance, recent studies in the new area of neuro-finance have also found that while investors are generally rational in nature, their feelings about risk play an important part in their financial decision-making. In the world of financial markets, feelings arising from positive or negative investment experiences can nudge usually rational behaviour away from objective "investment" decisions, toward much more subjective "speculation".

In the current investment environment, among other comparisons referring to the strength in financial markets, it has been noted[1] that if US economic growth continues for the next 18 months it will be the longest economic recovery since the 1850s.*

However, as most investors well know, this feeling is not without its hazards. One recent study[1] in the field of neuro-science has cautiously noted that, "usually we find that investor's behaviour is affected by certain emotions. Optimistic expressive states, such as enthusiasm, lead to risk-taking behaviour and [for investors] to be overconfident in their capacity to estimate investment choices".**

In summary, the study suggests that the brain's chemical response to positive investment returns will trigger feelings of pleasure and greater risk-taking, while unexpected losses will trigger anxiety and erratic decisions which "may further lead to multiplied losses and high transaction costs." In particular, the study suggests that the old adage of "take the money and run" is a "tendency developed because of [a] reduced supply of serotonin".

Neuro-science aside, objective advice based on well-founded research is one way to moderate the less rational investment behaviours that may naturally be triggered as a result of positive or negative investment experiences.

In the area of investment advice, we refer to this part of the advice process as establishing the "basis" for acquiring or disposing of security and then considering the "suitability" of the transaction, given the Adviser's knowledge of the investor's personal financial situation.

Advice which provides a basis and considers suitability, which are both core aspects of a professional investment advisory service, is a recognised and proven way to moderate the emotional effect of personal experience, before making important investment decisions.

In 1931, Noel Coward famously wrote of the wisdom of avoiding the midday sun, wryly observing that those that are wise do not consider themselves "impervious to heat". But as his humourous song also observed, it's not a matter of staying indoors indefinitely; it's just simply a matter of seeking shade from the hottest part of the day.

*Oaktree Capital Management, L.P.
**The New Era of Finance : International Journal of Finance and Marketing (2016)

By Gordon Noble-Campbell
Director,  Private Client Services

For a printable PDF of this article click here