Actually nobody wants to lose money in investments but in my experience, majority of investors will not make money. Here are some reasons why investors will not make money in their investments:
- If you want to earn money quickly, you will lose it even faster. This has to do with speculation. Investment & speculation are not the same. Speculation means your desire to earn quick money. This will not work. Common ways of speculating is to purchase stock without even doing any financial statement analysis to determine its fair value. Another way of speculating is to use margin trading such as Contract for Difference (CFD). CFD can be used as a hedging tool but we all know that most people use it for speculation in the hope of earning amplified profit. A few weeks ago, I met a client who invested $20,000 in stocks over 1 year but her investment amount now is just less than $5,000. I was puzzled because the equity market did not perform that bad. She later admits that she did margin trading. So her losses were amplified. This $20,000 was nearly equivalent to her 1 year gross salary.
- Investing when you have no ability of doing so. Up to now I simply cannot understand how could a person with less than $10,000 in personal savings could buy a unit trust of $5,000? Apparently many young people after graduation seem to think that they are very rich. Actually they have no ability to invest because their savings is so little that in the event of loss of job or illness, a major cashflow crisis would occur. Are they thinking that they could rely on their mummy & daddy for support if this would to happen? I pity their parents.
- You monitor too closely. If you would to check your investment prices too regularly, you will end up losing your money. This has to do with emotions. The more you check, the more emotional you get. When the price drops by a certain percentage, you will be so emotional that you will end up selling it at the lowest point. I always tell my clients this – throw the monthly investment statements away because the more a person looked at those statements the more emotional one will be.
- Attracted to scams. There are many scams operating even within Singapore. The reason why they could operate in Singapore is because of a legal loophole. Apparently the definition of “securities” under the law is too rigid and narrow. Many scams could not fit into the rigid definition although it is clearly investment in nature. Since they are not defined as “securities” our local regulator does not supervise the operation of these scams. Usually when the scam is exposed it will be because of many complains from investors. However, these scam operators would have left the country earning themselves a fortune. Financial advisers who are able to identify these scams do not dare to publicly say so as scam operators are able to sue them for defamation. The bottom line? Only invest in regulated products. If purchasing these products within Singapore, ensure it is regulated by Monetary Authority of Singapore. With the prevalent use of internet, those who “DIY” and purchase investment products outside Singapore using the internet must ensure what they are purchasing is regulated by the foreign jurisdiction’s regulator – and make sure that the foreign regulator is equally or more capable than our own local regulator.
- An investment product that is too complicated to understand. The classic example that is often quoted is the Lehman MiniBond. I seriously doubt anyone could understand what the prospectus is saying. If you don’t understand it, avoid it – simple! Sometimes in the name of diversification you could end up buying many investment products. However, you will find it hard to manage your portfolio because of the complexity in maintaining so many products.
- If you listen to fund managers, you could lose a lot of money. Not too long ago, many fund managers were saying that the US economy and Asia economy was decoupling. When the US economy crashed in 2008 (the MSCI USA Net returned -37.57% in USD), Asia went crazy crashing down even harder (the MSCI Asia ex Japan Net return for 2008 was -52.38% in USD). Not only there was no decoupling. the correlation turns out to be perfectly positive. I hate to say this but these fund managers are as clueless as you and me. So why bother to attend fund talks, read their newsletters and interviews? Moreover, have you noticed that fund managers always say that the market’s valuation is low, demand is high, supply is low, earning growth is expected to be positive, etc? Even prior to the crash in 2008, I was still hearing this.
- Trying to time the market. There is no way to time the market perfectly. You need to be correct twice when timing the market – correctly buy and correctly sell. If either of this is wrong – you lose. If fund managers are as clueless as you & me, what makes you think you can outsmart those fund managers who do this full time armed with Masters in Finance and some even with PhD? When Lehman Brother filed “Chapter 11” bankruptcy protection on 15 September 2008 and when AIG was bailout by the US government on the 16 September 2008, a few of my clients “fired” me because I advised them to hold on to their existing positions and not try to time the market. They pull out of their investments right in the middle of the Armageddon crisis and “fired” me for an advice they did not want to hear and thus they locked in their losses. As I look back retrospectively, my advice was correct but unfortunately not heeded by them.
For the past 1 Year Return as at 31 September 2009 the returns of the various major markets were:
* Asia markets (MSCI Asia ex Japan Net USD) +26.74%
* US market (MSCI USA Net USD) -7.47%
* European markets (MSCI Europe Net USD) +1.57%
* Emerging markets (MSCI Emerging Market Net USD) +19.07%
In case you are wondering, after Lehman Brothers declared bankrupt in September 2008, the equity markets all over the world continued to slide down for another 6 months before a massive rebound for the following six months. In the sense these clients who “fired” me avoided marking losses for those six months but they missed the entire massive Bull Run. To date, they continue to be in the red because they are out of the market.
But I was no hero either because I did not dare to take in lump sum investment during the fourth quarter of 2008 and first quarter 2009 when some clients came to me for financial planning advice. I just got them to do regular saving plan (RSP) as I was as clueless as fund managers and everybody else who could not time the market perfectly. In retrospect, everyone who did RSP since 1 year ago has made some nice profit – cluelessly!
So the lesson is this, those who think they are smart to time the market will be outsmarted by the market itself. It is better to be humble and admit to be ignorant and clueless.
This blog first appeared in CPF Board's IMSavvy / IM$avvy website: http://www.cpf.gov.sg
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