Algorithms and trends regularly dominate financial markets. But the biggest danger for investors often lies in something much simpler: their own gut feelings. Recent research by Allianz Global Investors shows how emotions and peer pressure can kill even the smartest investor. Fortunately, a systematic investment strategy may offer a solution.
This insight is by no means new. Great thinkers, from Goethe to Nobel laureate Daniel Kahneman, already distinguished two ways we make decisions: through our mind, which is logical and thoughtful, and our intuition, which reacts quickly and impulsively. In prehistoric times, both systems were crucial – one to hunt for prey, the other to plan agriculture from sowing to harvest. But in today’s financial arena, where the stakes are high, they often work against each other.
From hoarding to the tulip craze: how emotions are driving the market
Emotions not only drive what we throw in our shopping basket, but also stock prices. Consider the German run on “Dubai chocolate” in 2024: the bars were so much in demand that shops had to ration them. The culprit? Herd behaviour, driven by FOMO – the fear of missing out on something – and reinforced by social media.
Exactly this same mechanism caused historical bubbles, from the Dutch tulip mania in the 17th century to the internet bubble at the turn of the century, explains Michael Heldmann, CIO Systematic Equity at Allianz Global Investors. ‘When everyone blindly follows the crowd, prices shoot up, far away from reality, only to inevitably collapse again.’
Greed, fear… and the fight for toilet paper
Can you remember the spring of 2020? The corona pandemic broke out and supermarket shelves were empty. Not because of real shortages, but because of pure fear. People stocked up on toilet paper en masse, even though manufacturers showed there was plenty.
“We see this same panic in the stock market. Greed drives investors to buy stocks that are ‘hot’ en masse, often at absurd prices. And on the other hand, fear leads to panic selling at the slightest bad news. Think of Black Monday in 1987: the markets plunged more than 20% in one day, only to rebound quickly afterwards,” says Heldmann.
Systematic investing: let the mind do the work
As an investor, how do you arm yourself against that emotional rollercoaster? Heldmann says Allianz’s “Best Styles” strategy offers an answer: systematic investing in equities. This strategy replaces a vague hunch or the delusion of the day with decisions driven by data and crystal-clear, predetermined rules. By sidelining the human, emotional factor, this method aims for disciplined, consistent choices based on hard numbers.
After all, a computer knows no fear or greed. It does not care about social media hypes and does not panic when the stock market falls. Heldmann: “Systematic strategies assess shares purely on facts – think profit figures or the financial health of a company – and only take action when specific conditions are met. That way, you run less risk of going along with short-lived trends and protect yourself from irrational euphoria or panic.”
A panacea? No, but smarter
Yet systematic investing is no guarantee of success. After all, algorithms are human-made and can therefore contain human errors or biases, especially if they are based on wrong data or a rickety model. The “quant meltdown” of 2007 painfully illustrates this: many investors then used similar computer models and all did the same thing, resulting in… exactly the herd behaviour they wanted to avoid.
The Best Styles approach takes this into account by actively driving diversification across different investment styles. This reduces the likelihood of “automated” herd behaviour. Through this model, we are not trying to eliminate all risks, but to make investment choices more resilient to emotional and social whims.
What it comes down to
Investing is and will always be surrounded by uncertainties and risks. “But AllianzGI’s research shows that the real pitfalls often do not come from the market, but are in our own heads. Those who recognise their emotional reflexes and choose strategies that minimise their influence are more likely to achieve more stable and smarter results,” says Heldmann.
So: keep a cool head and let your mind manage the portfolio.
