Remove the weeds

Myth 1

Any investment risk is bad

Fact

Risk is part of any investment

Risk is not to be feared but understood. Understanding risk and being comfortable with it is the key to achieving one’s financial goals.

Even the most conservative investors would need to take on some risk so that their savings can grow faster than inflation.

Myth 2

Only high risk will produce high returns

Fact

Low risk can produce high returns, if the purchase price is low and holding period long

Utility stocks, for example, are typically considered lower risk due to their non-cyclical nature. Investing in these at the right price and holding them can potentially result in attractive regular income and capital gains, as many utility stocks pay regular dividends.

Myth 3

Risk is the same as volatility

Fact

Higher volatility does not necessarily equate to higher risk

Typically, the greater the price fluctuations, the more volatile the investment. However, higher volatility does not necessarily mean higher risk. Investing during periods of market volatility can be rewarding for long term investors.

Having well-defined financial goals can help investors ride through choppy markets and stay the course during turbulent times.

Myth 1

Volatility is bad

Fact

It's a natural part of the market landscape

Volatility is a fundamental part of the market. Post the Global Financial Crisis, however, asset purchases by developed market central banks have kept market volatility abnormally low. This phenomenon may or may not continue.

Extended periods of low volatility can make investors complacent and take on too much risk to achieve one's financial goals.

Myth 2

Don’t invest when markets are volatile

Fact

It can be a time of opportunities, too

When markets dip, fear causes stocks to be oversold, creating opportunities for investors.

Myth 3

Low volatility stocks = low returns

Fact

They outperform high volatility stocks in the long run

Academic research as early as 1967 shows that low volatility stocks outperform high volatility stocks over the long term. This anomaly is seen across multiple regions and countries.

Having well-defined financial goals can help investors ride through choppy markets and stay the course during turbulent times.

Myth 1

Big is beautiful

Fact

Size is not everything

Large capitalisation (cap) companies are typically more stable and have more publicly available information. Many small cap companies, however, are attractive given their innovation and agility.

By investing only in large companies, you may also be missing out on the early stages of growth of high quality but small companies.

Myth 2

Small caps are risky

Fact

They can be more resilient than large caps

Small caps are historically more volatile than large caps. However, as domestic factors are more important for small caps, they can be more resilient than large caps, especially when global uncertainties (e.g. trade, exports) are high.

Myth 3

Small caps outperform large caps

Fact

It’s hard to say

With so many factors at play, you need a 360º look at each company. Research is not conclusive that small caps outperform large caps all the time. Hence, investors may not achieve higher returns simply by favouring small caps over large.

As there is publicly less information available on small caps, the sector is more prone to mispricing, allowing active managers to add value.

Having a mix of both big and small companies can help you stay diversified and enjoy the best of both worlds.

Myth 1

You are in control

Fact

You have little control over how markets can affect your investment outcome

Thinking you are in control can lead you to trade too much and/or try to time the market. It may also cause you to have too little diversification in your portfolio.

Ask yourself why you are buying the investment and what might go wrong. Maintaining a long-term perspective can also keep the illusion of control in check.

Myth 2

Best to avoid change

Fact

Sometimes, avoiding change may not always be best, even if it looks safe

You may feel more comfortable keeping things the same because of inertia, and not as a conscious decision. This is partly due to your instinct to cling onto the familiar, especially when things are uncertain.

A change of perspective can help with inherent biases.
E.g. Wondering if you should add more bonds to your portfolio? Ask yourself why you should NOT.

Myth 3

Stick to what you know

Fact

Don’t miss out on the potential of less familiar but attractive options

By preferring to invest only in companies or markets which you are more familiar with (e.g. domestic bias), investors may also fail to diversify their portfolios sufficiently.

Familiar does not mean safe. A financial adviser can help you validate your existing investments and make you aware of other opportunities.

Myth 4

If you’re losing money, wait to make it back

Fact

Sometimes, it is best to cut your losses early and move on to find other attractive options

Research suggests that investors fear losses more than they desire gains. This is why they refuse to sell loss-making investments in the hope of making their money back.

Imagine you need to sell an existing investment before taking on another. This can help you think about what you’re missing out and be more selective.

Myth 1

Cash is king

Fact

Holding cash has its downside

The value of a dollar is worth more today than tomorrow - thanks to inflation. Even the most conservative investors need to invest their cash to make sure their savings grow faster than inflation. Particularly when interest rates are low.

Idle cash not invested is lost potential returns. Idle cash in the bank should not exceed 6 months of living expenses.

Myth 2

Gold never loses its shine

Fact

Gold has its share of risks

Gold may be a hedge against inflation, but it is an unproductive investment in that you don’t earn income from holding gold. While gold adds diversity to a portfolio, its price is affected by market sentiment, the economy and the US dollar.

Other than gold coins or bars, you can consider buying the shares of gold mining companies but look out for their profitability.

Myth 3

US Treasuries are the safest assets

Fact

Nothing is completely risk-free

US Treasuries are government bonds, highly liquid, enjoy a high sovereign rating and have never defaulted. But as with all bonds, rising interest rates can erode the value of your investment.

Central banks tend to raise interest rates to counter inflation. Investing in Treasury Inflation Protected Securities (TIPs) is one way to protect your portfolio against this risk.

Myth 1

Doing good comes at a cost

Reality

Focusing on ESG factors can help reduce exposure to long-term risks

Research suggests that returns from sustainable investing are comparable to the market over the long-term ¹. Companies that have sound policies that consider their impact on the environment and society tend to have more sustainable business practices and less exposure to damaging incidents. This makes their earnings less volatile.

¹ MSCI, “Foundations of ESG Investing”, https://www.msci.com/documents/10199/03d6faef-2394-44e9-a119- 4ca130909226

You can enjoy comparable returns but with lower volatility over the long-term through Responsible Investing.

Myth 2

Responsible Investing is a fad

Reality

It’s more mainstream than you think

As investors acknowledge that environment and climate related risks are long-term global challenges, Responsible Investing has become more mainstream. As of 31 March 2020, the Principles of Responsible Investing, the world’s leading proponent of responsible investment, had 3,038 signatories, representing USD 103.4 trn of assets.

You can make a positive impact through your investments by selecting managers who actively integrate ESG considerations.

Myth 3

Responsible Investing means you don’t invest in companies with poor ESG track records

Reality

There are many approaches to Responsible Investing

Different asset managers have different approaches to Responsible Investing. Some choose to exclude certain companies based on their business activities. Others choose to integrate material ESG factors into their investment decisions and to engage with investee companies. The latter approach hopes to influence changes in business strategy and activities, which may add value to their investments over time.

There are multiple ways to integrate ESG considerations into an investment process. Pick funds with investment objectives that align with your core beliefs.

Myth 4

Responsible Investing may give me too much, or little, exposure to certain sectors

Reality

Managers may or may not limit sector exposures

Some investors worry that Responsible Investing may result in unintended consequences. This may include too much exposure to the technology sector (which has zero carbon emissions) or too little exposure to the financial sector (which historically has had many controversies).

In reality, managers may or may not limit sector exposures to manage shorter term deviations from market performance.

Review fund disclosures to understand the potential deviations or tilts which your investment may be exposed to.

Myth 5

Responsible Investing is less effective in the Emerging Markets due to lower ESG ratings

Reality

Changes in a company’s behaviour towards ESG considerations matter more

Developed markets, especially Europe, may lead in terms of the quality of information companies disclose on ESG metrics as well as in terms of having higher ESG ratings.

However, it is not the ESG rating that matters to the markets. It is the change in a company’s behaviour that becomes recognised by the market that matters. Investors cannot rely simply on ESG ratings – very often, the ESG ratings of different providers may not agree with each other!

Don’t shy away from Responsible Investing in Asia and the Emerging Markets. Many policymakers in these countries are implementing frameworks to improve ESG reporting in their markets which can in turn influence company behaviour for the better.