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There are a few common myths about investing that are not only easy to believe but are likely to drive the wrong investment behaviour and keep you from reaching your investment goals.
Here are four key myths to be aware of:
Myth 1: The aim of investing should be to maximise your return
Most investors want the best possible return, but chasing after returns have two significant drawbacks:
- It means you are likely to pursue last year’s best unit trust, share investment or exchange-traded fund (ETF) and cash in on your investments when they are cheap, only to buy stocks or other investments when they are expensive – the exact opposite of what you should be doing
- It means you may be exposing yourself to unnecessary risk and fall prey to schemes that offer great returns, but fail to deliver
Rather, the aim of investing should be to put you in the best possible position to reach your investment goals. If you want to buy a car in three years or send your kids to university in ten, you can select your investments in line with these goals and the investment time frame without taking unnecessary risk.
Myth 2: When turmoil hits, you need to adjust your portfolio
It is easy to get scared and emotional when load shedding intensifies or when a Finance Minister gets fired (again) or when there are calls for land expropriation without compensation or to nationalise the Reserve Bank. You may feel that you should make changes to your investment portfolio to mitigate against these risks.
The truth is that if your investment portfolio has been constructed in line with your goals, investment horizon and risk profile and is properly diversified, this is not something you should be concerned about. So when should you make changes to your portfolio? When your personal circumstances change. For instance, when you get married, divorced or have another child, you should probably revisit your financial plan and portfolio of investments to ensure it is in line with your goals.
It is often a good idea to evaluate your financial plan and investment portfolio at least once a year but tweaking your investments every time a politician makes a controversial comment or when the market starts falling, is an almost sure way to destroy value.
Myth 3: In the long run, markets and share prices always go up
In the long run, stock market indices and well-run companies’ share price graphs do tend to show an upward trend, but this is not a given.
The leading Japanese Nikkei 225 index reached a historic high of almost 39 000 points late in 1989 before going down gradually for roughly 15 years, ultimately falling below 10 000 points. At the time of writing, it traded at roughly 22 200 points – still nowhere near its historic high.
Closer to home, there are also some great examples of shares that have rewarded shareholders over long periods of time, only to wipe out almost all these gains in a few days or months. International furniture retailer Steinhoff and technology service provider EOH are two recent examples of companies that have fallen from grace.
Unfortunately, it is not always possible to avoid a share price meltdown. Even some asset managers with a good track record have lost money in Steinhoff and EOH. This demonstrates the importance of constructing a well-diversified investment portfolio, so that in the unfortunate event that you do have exposure to a company or investment that performs poorly or that goes bust, you have enough well-performing investments to make up for one or two bad apples.
Myth 4: Market commentators and analysts know where the rand and markets are heading
Radio shows and investment news sites are littered with commentary from experts who seem to know where the rand or markets are heading or who are predicting an impending meltdown. Often this is based on historical data, their experience or the fact that they make money by selling a specific type of investment.
While you may think that you are paying your financial adviser or asset manager for his forecasting ability, the truth is that no one knows where the rand will trade against the dollar in the near term, what a certain stock price will be by the end of 2019 or what will happen to the price of Brent Crude oil this week. The shorter the forecasting period, the more likely these individuals will be wrong.
Forecasting becomes even more difficult where political events are concerned. Very few analysts thought Britain would vote in favour of leaving the European Union or that Donald Trump would be elected president of the United States.
Although analysts’ theories and predictions can be insightful, be careful not to bet the farm on the forecast of some prominent market commentator, particularly when they have no skin in the game.
The bottom lineThe biggest problem with investment myths is that they can move investors to make emotional decisions that can be highly destructive to their wealth in the long run. Rather stick to the basics. Ask yourself what your financial goals are, construct a diversified investment portfolio in line with these goals and stick to your plan.
