You know the spiel by now: Your CPF isn’t enough, inflation is high, medical costs are up, and if you don’t make good investments, you’d better tie this noose around your neck and just end it now. It might be a scary sales script, but there’s some truth to it: A bad investment can ruin any prospect for future wealth. So before making a decision, check that you aren’t making these mistakes:
1. Taking “Index Funds vs. Actively Managed Funds” to Extremes
This is the financial world’s equivalent of the Mac vs. PC debate.
And like the Mac vs. PC debate, there comes a point where logic is no longer a concern. Complete polarization occurs, and you hear things like:
“All actively managed funds are rip-offs“, or
“Index funds will never generate good returns”
But actively managed funds and index funds are just products presented to you. There’s no need to treat either like a religion. If you insist on a black-and-white perspective, you could damage your wealth out of sheer stubbornness.
If you already have savings and stable investments, you might want to risk an actively managed fund; it could be the step that takes you from well-off to rich.
But if you’re new to investing, you ought to pick an index fund. No offence, but I could dress a bum in a suit, and you couldn’t tell between him and a good fund manager right now. (Hint: The bum would have better social skills)
But it doesn’t have to be either / or. You can invest in index funds first and managed funds later, or even have both in your portfolio. Choose the funds based on your financial situation, not because you want to rally behind one of two camps.
2. Buy the Most High-End Property You Can Get
Property is one of the safest investments in Singapore. It’s also one of the most over-hyped. Just read the property success stories on the net; there’s more realism in an El Ron Hubbard novel.
Property investments only make sense if you have holding power. There’s no point getting a District 9 condo if it means a 50 year loan, or if it means you’re forced to sell when interest rates rise.
And remember that mid-range properties have consistent demand. When times are bad (like now, in case you’ve been in a cave since ’08), high-end properties become a luxury. Tenants will downgrade from them, in favour of mid-range properties.
So don’t go after high-end units with deluded expectations. Buy something that would cost less than 40% of your total income per month. And don’t forget to shop around for the most affordable loan package (try comparison sites like SmartLoans.sg).
You can also follow us on Facebook for Singapore property news.
3. DIY Equities and Trading
No, it does not matter that you “read a book about stocks once”. DIY traders are mostly clueless; they play the market with no strategy, no stop-loss, and only fundamental analysis (of their horoscope, that is).
When you have no idea where your money’s going, trading stocks is no longer investing. It’s just a socially acceptable form of gambling.
I spoke to stock broker Chin Leong, who tells me:
“If your idea is to tikam and guess, and you don’t know how to do any analysis, then I think you buy 4D better. Easier, faster, need less capital. If you lose, it’s the cost of a 4D ticket.”
Well, maybe some people just don’t trust brokers and their ilk. Right Chin Leong?
“So you don’t trust brokers or financial consultants in person, but you heed our advice when we appear on TV or write a book? If you are going to DIY based on our advice in the news, why don’t you just come to us directly? Isn’t it better?”
4. Chasing the Flavour of the Day
Another favourite tactic of Singaporeans: Switching investments to the flavour of the day.
You probably know people like these. When the news says silver prices are rising, they dump their stock and start hoarding silver. When they hear property prices are rising, they want to take out a 30 year loan right now. If you get on the radio and claim Labradors poop gold, they’d raid every pet shop from here to Kota Tinggi.
Chin Leong claims that this mentality is a wealth destroyer:
“There is always some sort of finance news, and it is always made out to be a big deal. If there is no big news, the reporters will have to answer to their editor (Hey! That’s only 90% true! – Ed.)
I’m not saying the news is out to bluff you. But the news is slower than the market. Obviously, the change must happen in the market first, and then the news can report it. So by the time you hear about how some company is leading, the price of that company’s stock is already on a high.
If you keep reacting to the news, you can end up in a cycle of buying high and selling low. You take on a herd mentality. Instead, you should allocate your assets strategically and stick with it. Stop trying to switch around every few days.”
5. Basing Everything on Past Performance
This only becomes dangerous when taken to extremes.
The past history of any investment is a possible indicator of long term performance. But it predicts little about the near future. Chin Leong claims:
“A history of five years is nothing, first of all. You want an accurate gauge of performance, you look at the past 20 years. Even then, historical data is never reliable for short term prediction.
No matter the past history, it’s never a good indicator for the next three to five years. If you give an investment 10 years, it may perform as its history suggests. But the shorter the time you give it, the more unpredictable the returns.”
When someone tries to sell you something, when they say: ‘Look at the past performance, you will surely make so much money after five years’, you have to take it with a pinch of salt. I don’t doubt that the history is accurate; but I doubt that it will reliably repeat itself in the next five years.”
Do you know any investment tactics to avoid? Comment and let us know!
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