The 7 deadly investment myths

Believing in such false notions can cause investors to either lose money or miss out on opportunities.

Thu, Sep 16, 2010
The Business Times

Wealth management and investments are not just for the wealthy. It's for everyone, no matter how much wealth you may have.Here are seven investment myths to be wary about.

By Vasu Menon
Vice-President, Wealth Management
Singapore, OCBC Bank

SUBSCRIBING to investment myths can cause investors to either lose money or miss out on opportunities. Understanding some of these myths and their pitfalls can result in better investment decisions.

Myth #1: Investing is exciting.

It is important to draw a distinction between investing and trading and speculating. Trading and speculating can give you the adrenaline rush and even make you fast money, but they can also cause you heartaches and leave you disillusioned if your bets go the wrong way.

Investing may be unexciting in the short term and may not yield you quick profits, but if you do your homework to identify good opportunities and invest prudently and set reasonable targets, it can provide you with decent returns over a three to five year period.

So investing requires patience but it carries less risk than trading or speculating, as it allows a greater time for your money to grow.

Myth #2: Good brand names make good investments.

Companies with established brands do not necessarily equate sound investments that assure good returns.

Take established US companies like Enron and WorldCom for example. They collapsed after being embroiled in accounting scandals and fraud. The former oil giant Enron filed for bankruptcy in December 2001 while WorldCom which was a telecom giant did the same in July 2002.

A more recent example is oil major, British Petroleum, which saw its share price plunge after its oil well in the Gulf of Mexico ruptured, resulting in the worst disaster in maritime history. No matter how established a company is, there are no guarantees it will not pull unpleasant surprises.

So, irrespective of how strong a company's brand name is, do not fall in love with it and over invest in its shares.

Myth #3 : The best way to make fast money is to invest in what's 'hot'.

Do not be a mere follower and purchase a popular stock or investment just because its 'hot' and everyone else is buying.

It's dangerous to adopt the herd mentality and take comfort in numbers.

Do your own research and analysis before taking the plunge.

Buy only if you fully understand what you are buying into and have the appetite to stomach the risk. If not, stay away.

Myth #4: Stay clear of investing when the outlook is uncertain.

In times of uncertainty, jittery investors tend to steer clear of markets or even sell off their investments, even if it means suffering losses.

While it makes sense to be cautious when the outlook is uncertain, there is also an opportunity cost to being too cautious, especially if markets suddenly turn around and surprise on the upside. For example, many nervous and panicky investors bailed out on their investments when markets were close to the bottom in the first quarter of last year.

As a result, they suffered losses and missed the subsequent strong market recovery which resulted in gains of more than 100 per cent in some instances.

Similarly, many overly cautious investors who were sitting on cash missed the boat, failing to buy when valuations were extremely low and attractive.

Looking ahead, uncertainty and volatility looks set to remain a fixture for several months. Instead of staying clear of markets completely and risk missing the boat, it makes more sense for investors to buy gradually and systematically over several months to mitigate the downside risk.

Myth #5: Always invest in the best performers.

Often, investors make decisions based on historical performance because of the mistaken believe that an investment which has done well in the past will continue to do well in the future.

However the strong historical performance may not recur if it was due to exceptional factors or because of undue risks taken by the fund manager.

So when buying into a unit trust for example, you should go beyond its past performance.

Other factors to look at include the risk adjusted returns of the unit trust, the kind of stocks or investments the fund manager buys into, the robustness of investment process and the experience of the investment team.

If you're not sure how to get this information, seek help from a financial adviser.

Myth #6: You have to be super smart to invest.

You don't need to be a financial wizard to invest.

Don't let the lack of knowledge or fear of financial jargon turn you off.

You can always start by attending basic courses on investments, reading books and online articles, consulting the right people and asking questions to address your discomforts or fears.

Also, check out investment seminars to pick up useful tips.

Myth #7: You need to be rich to start investing.

In case you are not aware, you can begin investing with just $100 each month through a regular investment plan. Such plans offer the additional benefit of dollar-cost-averaging.

Also, when you start investing early, you benefit from the power of compounding as well.

OCBC shall not be responsible for any loss or damage whatsoever arising directly or indirectly howsoever as a result of any person acting on any information provided herein.

This article was first published in The Business Times.