“If you want to have a better performance than the crowd, you must do things differently from the crowd.” - Warren Buffett
With recent volatility in global financial markets, and particularly locally here in Singapore, it is little wonder that we are seeing investor nerves sky-rocketing. The Straits Times Index (Singapore) has fallen over 26% in the last 12 months.
Unfortunately, the common sense of buying low and selling high is rarely applied when emotions start driving financial decisions for Singapore's investors. There are a number of common investor mistakes that are repeated during periods of market volatility and are important for investors in Singapore and globally to keep front of mind.
1. Trying to pick the bottom
The average investor who missed out on the top 10 trading days over the last 20 years generated a return that was approximately 40% less than those who stayed invested and remained on track to achieve their long-term goals. Trying to pick the bottom will often lead to under-performance of the market and missed buying opportunities.
Investors should instead focus on buying value when assets are cheap and reducing their holdings when they're expensive, rather than trying to time the market peaks and troughs. Those investors who simply invested in the Straits Times Index (STI), a basket of stocks representing 14 sectors, would have generated a return in excess of over 9% per year.
2. Listening to the media
Firstly, it is commendable to see people read personal finance blogs and relevant information to increase their financial knowledge base. It’s important to recognise that some sensationalised media sources will rarely lead to positive investment outcomes.
Investors should instead stay focused on long-term goals, their investment strategies and remember that market 'noise' should never replace sound research and analysis.
3. Ignoring common sense when investing
Imagine if we applied the same behaviour to shopping as we do to investing. When prices are dropping in the stores, we would stay away, and when prices were rallying and at their peaks, we'd be buying more thinking it's a bargain. To put this into perspective, when the sales are on Orchard Road would be a ghost-town, and as prices start rising shoppers start lining up.
Obviously, this goes against common sense, but it's important to realise that this level of common sense is rarely applied to investment strategies. It is however often what leads to the greatest financial outcomes in achieving your personal financial goals.
4. Taking the wrong level risk
It's important that during these periods of market volatility investors monitor the level of risk that they're taking on. Remember, risk and return is a constant trade-off and this should be aligned to an investor's own personal financial goals.
Taking on too much risk can lead to uncomfortable levels of market volatility, and taking too little risk on can lead to under-performance and an investor not achieving their financial goals. Neither option is a positive outcome and an important reason to stay the course.
We're likely to see further volatility in the region, with trade into China falling, property prices in Singapore continuing to fall, and increased pressure on borrowing, so investors in Singapore must remain focused on their strategies and continue to keep common sense front of mind.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Jarrad Brown is an Australian-trained and qualified Independent Fee-Based Financial Adviser with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.