In the world of investing, it's easy to get caught up in the latest trends and advice. But not all investment wisdom is created equal. Here's a look at some common pieces of investment advice that might be better ignored, according to experts. From the dangers of home bias to the pitfalls of trying to time the market, these insights offer a fresh perspective on how to navigate the complex world of investing.
Buy What You Know?
The idea that buying what you know is a smart move is a common piece of investment advice. But Dean Anderson, founder of Kernel, warns against taking this too literally. While familiarity with a company can provide some insight, it's not a reliable indicator of a good investment. Anderson points to the example of Air New Zealand shares, where many investors bought in post-Covid, only to see their investments drop. He argues that this approach can lead to over-investment in well-known brands, potentially missing out on better opportunities.
Home Bias and the Importance of Diversification
Gertjan Verdickt, associate professor of finance at the University of Auckland, highlights the issue of home bias. Many New Zealanders invest too heavily in local companies, neglecting the benefits of international diversification. Verdickt suggests that investors should aim to hold international stocks in proportion to their global market cap weight, currently around 59%. This approach can help spread risk and potentially boost returns over the long term.
Don't Invest in Your Employer
Verdickt also advises against investing in the company you work for. While it might seem like a good idea to benefit from your employer's success, this approach can be risky. If your company goes bankrupt, your investments could be severely impacted, and you may find yourself unemployed. Diversifying your investments is key to managing risk effectively.
The Home as an Investment
New Zealanders often view property as a key investment, but Verdickt warns against treating your home as your most important investment. An owner-occupied home doesn't provide a significant income and can be illiquid. While homeownership can be beneficial, there's little evidence that buying is financially superior to renting and investing the difference. This perspective challenges the popular notion of housing as a 'can't-miss' investment.
Save 10-15% of Your Income, But Not Constantly
The advice to save 10-15% of your income at every age is often given, but Verdickt argues that this approach ignores life-cycle income patterns. Economists suggest smoothing consumption over time, with lower savings in early adulthood, higher savings in midlife, and spending down in retirement. This strategy aligns with the time value of money and can lead to more economically optimal outcomes.
Emergency Savings and Credit Card Debt
Building an emergency savings account is crucial, but Verdickt suggests a nuanced approach. It may not make sense to save for emergencies while carrying high-interest credit card debt. Instead, it's often more beneficial to pay down debt and use available credit when needed. This strategy can help manage cash flow more effectively.
Timing the Market: Don't Jump In or Out Based on Headlines
Ana-Marie Lockyer, chief executive of Pie Funds, advises against trying to time the market. Jumping in or out based on short-term movements or headlines can be risky. Lockyer emphasizes the importance of a long-term, diversified approach. By focusing on a strategy that suits your timeframe and sticking with it, you can avoid the pitfalls of market volatility and potentially improve your long-term returns.
Quick Wins: Avoid Short-Term Gains
Lockyer also warns against seeking quick wins. Investing is most effective when it's boring and consistent, diversified, and aligned with your goals. Taking a step back from the noise and focusing on a long-term strategy can help you avoid the pitfalls of market fluctuations and ensure your investments are working for you in the long run.
In the world of investing, it's crucial to stay informed and question conventional wisdom. By ignoring certain pieces of advice and adopting a more nuanced approach, investors can potentially improve their financial outcomes and navigate the complex world of investing with greater confidence.
