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Anonymous

05 Nov 2020

โˆ™

SeedlyAMA

What are the common misconceptions you see that people have with investing and why are they so common?

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I'll give 2 misconceptions based on interactions with friends:

  1. Some friends are confident they're doing well because they have a host of investment-linked policies, without delving into the funds they're actually investing in, and not considering the fees incurred. Probably due to lack of knowledge And refusal to find out more.

  2. That active investing is better than passive investing because can 'buy low sell high' and anticipate trends easily.

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Common misconception:

DIY (i.e stock picking) performs better than investing in a portfolio of ETFs

Why:

Survivorship bias

People only show you what they want you to see. If some one had a portfolio with net losses, would they reveal their "secret"?

Hindsight bias

People show you that 1 or 2 stocks they bought that returned 1000% over 10 years, hence convincing themselves and others that they can beat the market. What about all the other stocks in their portfolio? Do they know it was going to "under-perform"? Do they know they are going to lose money at some stocks?

Then why did they still buy it in the first place?

Superiority bias

People think they are above average, hence why settle for ETFs when they can DIY and earn extraordinary returns. If everyone thinks they are above average, then who exactly is average?

DIY only gives you a POSSIBILITY of extraordinary returns (let me benchmark that using the S&P500). When we do research, we are DECREASING the probability of investing in sub-par companies.

Whereas investing in a portfolio of ETFs, we are capturing a larger basket to INCREASE the probability of getting a multi-bagger.

Weigh the pros and cons yourself.โ€‹โ€‹โ€‹

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James Yeo

05 Nov 2020

Editor at SmallCapAsia.com

There are too many to name so I will come up with 1 common misconception. Investors always focus on ...

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