The investment world is filled with tons of mis-information. When people accept some of this mis-information, they become myths that can be dangerous for investors. Schools are even teaching some of these myths.
Below are 5 investment myths that all investors should know about.
# 1 “Bonds Are Safe”
The global financial crisis in 2008 should have taught us not to entirely believe banks when they sell us bonds that they claim are “safe”. Anyone remembers the Lehman Brother minibonds?
Due to falling oil prices in 2016, many oil and gas companies have struggled and the fallout from the sector have not been limited to just equity owners. Bondholders have been affected with multiple companies such as Swiber, Otto Marine and Marco Polo Marine running into difficulty repaying their loans.
The idea that it is “safer” to lend money to a company rather than to invest in it have been blown out of proportion by bankers selling retail bonds in recent years, as investors started moving from “risky stocks” to “safe bonds with regular interest payout”.
Technically, bonds are “safer” since bondholders get paid off first before equity holders in the case of liquidation. That being said, whether or not they are really “safe” depends a lot on the company you are lending money to, rather than the instrument itself.
Many retail investors found themselves left on their own when Swiber bonds defaulted, despite the fact that many of them were told by the banks they bought the bonds from that bonds are safe with regular payout. They did not look deeply into the companies they were lending money to, as they might have had they been investing in it as an equity owner instead.
# 2 “Properties Are A Sure-Win”
Till today, many property agents are still preaching the myth that properties are a sure-win despite the many reports that should owners selling at losses, even before taking into consideration interest and transactional costs.
While we believe that real estate is one of the key pillars of investing for successful investors, it’s still similar to every other investment out there like stocks and bonds, you can lose money if you buy the wrong asset at the wrong time.
The problem that exists in Singapore is that previous generation of property investors have seen amazing returns, both from the public and private sectors, due to the economic growth that Singapore has enjoyed since independence.
This has fuel optimism bias when it comes real estate investments, with many people being over-confident and paying high price that are beyond what they can afford, with the belief that they will surely make money.
# 3 “Risk Is Bad”
Whenever we hear someone tell us that they do not want to take risk in their investment, we wonder if they actually understand what is it they are talking about.
Risk and return are co-related. Earning higher return requires investors to take on higher risk. You cannot expect one without the other, unless of course you are being sold a scam in which the salesperson may tell you that you can get high returns without taking on risk.
Risks may also exist in different forms. Most of the time, investors are only concerned with investment risk – this risk is that their investments would be worth less in the future than what they bought it for. However, there are also other forms of risks involved such as interest rate risk, liquidity risk and foreign exchange risk that investors may not have considered.
Risk by itself is not a bad thing. It’s only when people take risk that they don’t understand when it becomes a problem.
When you invest, always understand the risks that you are taking in an investment. Ask yourself if the risks you are taking translate into higher expected returns. If the answer is no, or if there are other less risky assets out there that gives you similar return, then you should think twice about investing in the asset.
# 4 “Overseas Investments Are Risky”
From a general Singaporean point of view, there is some truth to the statement but mostly because the average investor does not know enough about overseas investments to sufficiently make it less “risky”. This brings us back to the earlier point of “risk” being a bad thing mostly because people don’t understand what is it they are investing in.
If you are an informed investor, seeking diversification by investing outside of Singapore could actually be safer, especially when you consider that the entire Singapore stock market capitalisation may be lower than just one stock on the Nasdaq.
In addition, for a trade dependent country like Singapore, external shocks (though no fault of our own) could impact the country’s stock market significantly. In contrast, for big markets like the U.S, performances of the stocks in the market are not as heavily affected by external factors.
# 5 “Investing Based On Historical Returns”
Investors and the people who sells investment products like to base future expected returns on what has happened in the past, even though most of us know that the past is not an accurate indicator of the future, especially when it comes to investing.
Investors who rely on past performance to determine what they should invest in usually do not understand what is it that they are investing in. Hence, they rely on indicators such as price history to predict how well they would do in the future.
For example, an investment advisor may recommend to his clients unit trusts that perform exceptionally well over the past 3 years, instead of evaluating them independently without taking into reference their past results.
We are not saying that historical results are unimportant and that you ignore them completely. A good track record is an important consideration when investing. However, you should avoid investing in an asset just because it has done well in the past.
What are some other investment myths that people are making? Share it with us on Facebook.
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Bonds and Fixed Income
Bonds and Fixed Income