Myth 1: Now is the wrong moment to invest
Contrary to widespread belief, for investors with the goal of long-term wealth preservation and growth, any time is a good time to invest. You may be unlucky in the short term, but staying invested and having patience are rewarded if you stay invested over years.
There will always be a reason to buy and to sell, but having an investment plan and following it diligently will result in higher returns than staying on the sidelines. Allowing your wealth to grow.
Myth 2: Only anxious investors diversify
Diversification is the process of spreading investments across different asset classes, industries, and geographic regions to reduce the overall risk of an investment portfolio. Nearly 80% of your investment returns can be attributed to your asset allocation, which makes this practice paramount for all (not only anxious!) investors. It is often described as the only “free lunch” in investing as it reduces the amplitudes of the ups and downs with the same expected return at the end. Diversification is one of the most effective strategies for reducing overall investment risk while also providing long-term performance at the same time.
Myth 3: Investing in your home market is a safe strategy
Just like single stocks or selected asset classes, countries also face risks. Consequently, investing in a single country or region is not advisable. While investing in China was a hype up until March 2021 as a result of its economic boom, in 2023 several market experts changed their opinion and became more cautious. China is not the only example. Just think of the UK after Brexit, or the Greek government debt crisis starting in late 2009. Investing in your home market is no guaranteed strategy for success.
Myth 4: Timing the market is key to being successful
Time in the markets beats market timing. It sounds like a cliché, but it has proven time and time again. Being able to predict the ‘perfect’ point in time to buy or sell is statistically highly improbable and therefore not a sensible strategy for investors. Instead, time in the markets is rewarded through compounding interest and protects investors against inflation.
Myth 5: Cash is the best store of value in a financial crisis
The chances of being able to predict a financial crisis are also incredibly low as these events are very rare. Holding on to cash is a guaranteed way to lose money, as your assets do not grow if they are not invested. While holding money in cash, you not only miss out on dividends and compound investing - you will also lose your purchasing power due to inflation.
Myth 6: Gold is the best protection against inflation
Gold has been a popular way to store wealth for thousands of years, which is one of several reasons investors like to turn to gold in volatile times. However, gold does not offer a guaranteed protection against inflation.
A gold investment in previous high interest rate times, around 1980, would have lost money in real terms until today. Gold is also not a yielding asset, meaning it does not pay dividends. So, while gold can be part of a diversified portfolio, equities offer a better hedge against inflation. For example, from 1988 to 1991, the US dollar lost 17% in value due to inflation, while gold lost 24% in value. (Source: Amy Arnott, investment strategist at Morningstar Inc.)
Myth 7: Only speculative investors buy stocks
As a matter of fact, most types of investors should invest in stocks. How many percent of your portfolio should be comprised of stocks is determined by your risk ability, risk tolerance and investment time horizon. Speculators are usually looking for high growth titles, using concentrated bets and frequent movements in and out of the market. This is neither sustainable for the average investor, nor a recommended recipe for wealth preservation and conservative growth goals. Investors should invest in stocks in a diversified way (see investment myth 2) and stay invested for prolonged periods of time to truly benefit from compound interest.
Myth 8: When it comes to investing, intuition is better than strategy
Often our intuition will tell us to flee the markets when they drop and buy more and be overexposed when we see a prolonged market rally. The result of this investment behavior is that we end up selling low and buying high – exactly the opposite of how we should invest. Instead of listening to your intuition, having a clear investment strategy that is built around your personal goals and reflects your risk tolerance is the best way to manage money. That’s why it is important to consult a wealth planner that truly listens to your needs and builds a plan around your situation, goals, and risk appetite, before you decide on how to invest your wealth.
Myth 9: Bonds are more secure than equities
Bonds have done very well for forty years between 1980 and 2020 due to falling interest rates from peak inflation in the early 80s to the negative interest rate environment the market saw a few years ago. However, if you were only invested in bonds during the last three years, you would not have done very well. Most bonds also don’t provide protection against inflation and have recently shed value. An example is the Austrian 100 year bond which has lost two thirds of its value since issuance. But don’t count fixed income out just yet: bonds are currently quite attractively priced and provide a handy tool for diversification, long-term wealth preservation and accumulation. The relevant question to answer is which mix of bonds and equities will help me achieve my long-term investment goals?
Myth 10: Investing in the stock exchange and going to Las Vegas are more of the same
Did you know that the game with the best odds of winning at a casino in Las Vegas is supposed to be single-deck Blackjack? With a maximum of 49.7% winning probability, this sounds like a good deal, doesn’t it? If you had opened a ‘balanced’ investment portfolio (50% Equities & 50% Fixed income) in USD in 1994, however, your chances of a positive year from 1994 until 2022 came out at 79.3%. When gambling, everything is based on luck. When following a disciplined investment approach, everything is based on a strategy for building wealth through diversification and asset allocation.
Nobody knows what the future will bring. However, a solid financial plan and diversification can ensure that your investments not only act as a hedge against inflation but bring you closer to your personal investment goals. At Julius Baer, we have been building our investment expertise and offering for over 130 years. One of the most important things we have learned is that every person’s investment needs are truly unique and require a personal investment solution.