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Idea of the Week: 3 Investment Pitfalls to Avoid [31 August 2012] August 31, 2012
Investors are often too focused on the news and market sentiment, which often leads to poor investment decisions
Author : iFAST


Idea of the Week: 3 Investment Pitfalls to Avoid [31 August 2012]


With investors eagerly awaiting hints at further stimulus measures from Federal Reserve Chairman Ben Bernanke at the Jackson Hole summit this week, there is much anticipation in the air as to whether “QE3” is on the cards. Will the Fed buy more bonds? Or will it wait for more signs of weakening in the economy before acting? What will ECB President Mario Draghi announce to investors after the ECB meets in September? If bond buying plans are announced, how will German Chancellor Angela Merkel react?

If you are one of the many investors following each and every newsbyte with your utmost focus with the aim of making better investment decisions, you may be heading down the path of a common investment pitfall – paying too much attention to the news. In this week’s idea of the week, we divert our attention (and hopefully our investors too!) away from the latest happenings in the market and zoom in on 3 common investment pitfalls which investors should avoid.

Pitfall 1: Being overly-focused on the news 

While it is certainly a good thing to be passionate about your investments, being overly-focused on the news may be detrimental to your investments. As an old investment adage warns, “If it’s in the news, it’s in the price”, and investors who react to daily happenings in their investments will certainly find themselves behind the curve in identifying the right investment opportunities.  In addition, the media tends to report what “feels” right at the moment to relate better to readers, which leads to more bearish views being aired when financial markets are doing poorly, while bullish views are the order of the day when markets are doing well. Investors who correlate their emotions with what they read are likely to invest more when markets are bullish, and sell more when markets are bearish, which may go against the logical approach of “buy-low, sell-high” (see Idea Of The Week: Emotions Hinder Good Decision Making [30 Sep 2011]).

We feel that investors should spend less time worrying about things in the news, but instead be focused on their own investment objectives and needs, parameters which are well within their own control. By considering these parameters alongside one’s investment risk appetite, a suitable allocation between bonds and equities may be determined to meet those financial goals, and the plan implemented in a disciplined manner. Investors who would like to know more about how to better meet their financial goals may wish to consult our Client Investment Specialists who will be happy to provide free advisory services for our investors.    

Pitfall 2: Trying to time the market

While there are investors who can successfully trade the market on a daily basis, the majority of investors are not well-equipped with the tools, technology or time to do so. Nevertheless, this has not stopped many from trying to time the market, in the belief that one can enter or exit the market at the “perfect” time, thus making returns which are superior to that of the stock market. Academic research has shown that most who try to time the market fail to do so consistently, leading to sub-par returns on their investments. At Fundsupermart.com, we believe that a disciplined approach to investing will lead to a more successful investment, which entails staying invested and accepting the market’s returns (which has historically provided decent returns for investors over the long term), rather than trying to trade in and out of the market, which can mean missing out on some of the stock market’s strongest periods of returns (see also “Can You Time the Market?” and “Idea of the Week: Why It Pays To Stay The Course [07 Oct 2011]”).

Pitfall 3: Not knowing enough about what you buy

While another common investment adage speaks of “buying only what you know”, many investors have a problem with not knowing enough about financial products before investing in them. The financial market crash of 2008-2009 saw mom-and-pop investors lose their entire life savings as complex structured products they invested in lost substantial amounts of their value. While investors believed they were buying fixed deposit equivalent investments, many of these products were actually structured such that the investor was exposed to the credit risk of both the product structurer, as well as all the underlying “reference” companies. Often, all it took was for one of the underlying “reference” companies to experience a “credit event” before the investment lost all of its value.

In contrast, unit trusts are some of the most transparent investment instruments available, with professional investment managers and custodians who act for the benefit of the investor. At Fundsupermart.com, we do not pretend that our unit trusts are all low risk instruments like fixed deposits; instead, investors can choose from a wide range of unit trusts of varying risk and returns in order to meet their investment objectives. Our investors are urged to explore the various sections of our website like the “school” section which has useful information for newer investors, while the various forms of performance data, charting tools and articles pertaining to each fund allow investors to perform an extensive due diligence on the product before making their investment. 



iFAST and/or its licensed financial adviser representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website. If you have any queries about the above contents, please contact iFAST.