By Leong Sze Hian
Why is it that most people lose money investing? Is it because of people’s misconcept
But before I get to answering this question, let me touch on how many people make or lose money investing.
To the best of my knowledge, there are no statistics on this. No, I am not trolling you. However we used to have the CPF Investment Scheme (CPFIS) cumulative profits and losses’ statistics up till the 11th year, after the CPFIS started in 1993.
It was a 75 per cent of investors who did not beat the 2.5 per cent return on the Ordinary Account after the 11 years. As for Singapore stock investors, the average loss was about 35 per cent, after the 11 years.
Lower risk assets?
So getting back to answer the original question. Why is it that most people lose money investing?
Let me start by asking another question on top of that question. Is there such a thing as lower risk in the different asset classes such as equities, bonds, cash, commodities, property, etc?
Of course there is. After all isn’t this what every textbook and what you read in the media always tell you?
So, imagine yourself walking into a financial institution and you say that you want a lower risk investment. It is most likely you would be shown the merits of investing in bonds, because they are of lower risk.
But are “Bonds” of a lower risk?
Before you decide to accept the conventional notion that bonds are “lower risk” – read the following:
Real loss of 91% in 35 years?
According to the article “Events in America show that no asset is copper-bottomed“ (The Economist, Oct 13)
“From the point of view of a creditor, however, the ability of a government to print money is of little comfort if the result is higher inflation (for domestic investors) or currency depreciation (for foreign ones). Investors who bought Treasury bonds in 1946, when yields were around current levels, did not suffer a formal default. But over the following 35 years they lost money in real terms at a rate of 2% a year. The cumulative real loss was 91%. By that standard, Greek creditors, who recently suffered a 50% loss via default, were lucky.”
After reading the above, you may be asking yourself – How come nobody ever told me about the risks of investing in bonds? – other than the fact that when a bond defaults, it may mean the total loss of your bond investment but the entire or geographical or sectoral bonds may be quite risky too?
So, how then do we reduce risk? Well, arguably, the only way is by diversification by having different asset classes, geographical, sectoral, active/index fund managers’ diversification, etc.
In other words, taking for example, a globally diversified portfolio of about 10 funds of approximately 30 per cent equities (developed, emerging markets, region, country, sector, big cap/small cap, etc), 30 per cent bonds (global, regional, emerging markets, etc), 20 per cent commodities, 20 per cent property (global).
In this connection, I understand that in the United States, if you are a trustee or an endowment fund, etc – you are required to have at least 20 per cent in equities – to “reduce risk”. This is also evident in the investment fiduciary guidelines of the Centre for Fiduciary Studies.
What question to ask before you invest?
Finally, don’t forget to ask no matter what you are considering to invest in – What is the worst thing that can happen? What is the worst historically event that has happened?
Statistics on clients’ accounts?
There was a conference whereby I was on a panel with regulators from different countries and I asked “I believe most financial institutions may have the data and statistics as to how many and what percentage of their clients have made or lost money, and by how much over different time periods. Why don’t they disclose this? It may help investors to make better decisions”
The answer from the panelists was basically that it would be a great marketing opportunity for the first financial institution to do that!
From this answer – perhaps give us a clue as to what the time-tested advice in buying anything may have always been – ask those you trust to recommend who or what to buy from – because there may arguably be no better guide than past experience on advice, service and performance.
Asking the wrong questions?
Having said the above – the irony in my view as to the most common reason why people lose money investing is … at every forum, meeting or interview -people are always focusing their questions on the returns – Which is the best investment? When is the best time to invest? etc, etc.
The truth is … nobody knows … we are all making guesses probably all the time!
Therefore, diversify, diversify, diversify … and sell those that have gone up the most when you need money, or at regular intervals such as when you are in retirement. And also avoid investment vehicles or products that are not regulated – remember the millions that people have lost investing in “gold guarantees”, multi-level marketing (MLM), etc, that turned out to be scams.
So beware! – whatever contract you have is only as good as if you are able to find or seek legal redress from the the company that gave you the contract for your investment in the first place!