Four investment myths on the rise
We take a look at these perceived investing wisdoms and explain why they are fast becoming new investment myths.
18 October 2016
The world of investing constantly changes and that means yesterday’s wisdom can soon become today’s myths. Or in some cases, the story moves along and some investors haven’t quite kept up.
Your own biases and assumption can pose a danger to wealth generation (you can test this at incomeiq.schroders.com). So here we run through some assumptions that could be described as myths.
1. Retiring soon? Take less risk.
The long-held wisdom was that as you approach retirement, your pension pot was steadily shifted out of equities and into lower risk investments, such as bonds.
This should help protect you from a stockmarket shocks in the last few years of work.
This made sense when most of us cashed in our pension pots at retirement age and used the money to buy an income for life via an annuity.
But the rules were relaxed last year and far fewer people now follow this route. Many more are choosing to keep their money invested and then draw an income to live on.
In this scenario, you might need the portfolio to support you for 30 years or more. History suggests that over such long periods, equities tend to deliver better returns than bonds, offering potential capital gains as well as income.
You may choose to continue taking extra risk to achieve greater reward, although isn’t always the case (see below).
Talk to your financial adviser or pension provider about your post-retirement plans.
2. All commercial property funds are hard to buy and sell
Property funds have hit the headlines this year after some were frozen, preventing investors from selling.
These funds, usually called unit trusts or “Oeics”, buy offices, shops and warehouses and are able to pay investors steady income from the rent received.
But when lots of investors want to withdraw money from a fund at the same time, properties must be sold rapidly – which can be impossible – or fund withdrawals must be frozen.
However, investors shouldn’t assume all property funds work this way.
Investment trusts also pool investors’ money and buy commercial buildings, like Oeics and unit trust, but because of the very different way they are structured, they do not face pressure to sell buildings when investors sell.
There are other risks associated with investment trusts, but liquidity – ease of buying and selling – is not one of them. Ask your IFA.
3. Online investment research: you can never have too much information
If you have ever booked a hotel online then you will probably have researched online reviews.
Read the first two or three reviews and you’ve convinced yourself, one way or the other. Read the next few and you begin to question yourself. Any more and you’re in a state of confusion.
Investing is the same: having too little information and you risk making a bad choice, doing too much and you risk overcomplicating the process.
To paraphrase Warren Buffett: “don’t make investing difficult”. Decide your goal and the investment strategy and don’t get distracted by the noise.
4. Investing abroad is high risk
Some investors won’t invest abroad because it is perceived as a higher risk. Certainly there is some currency risk.
If the pound rises against the US dollar, for example, then it will probably make your US-focused funds worth less regardless of the performance of the assets.
It worked the other way after the EU referendum in June when the pound slumped, boosting the value of money held in funds that invest overseas.
But these risks exist anyway. For instance, 70% of FTSE 100 company profits are generated overseas. When the pound falls, their profits rise in sterling terms.
Global investing may not be right for everyone but it offers diversification – spreading your money around different markets - which can lower risk.
Investing anywhere comes with inherent risks. The value of your investments can go up and down. Nothing is guaranteed.
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