In the world of investing, it's easy to get caught up in popular advice and trends, but it's crucial to discern which strategies are truly beneficial and which ones might be misleading. Here's a breakdown of some investment advice that, while well-intentioned, might be better ignored or approached with caution.
Buy What You Know
The idea that "buy what you know" is a common piece of investment advice. However, 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 highlights the example of Air New Zealand shares, where many investors bought in post-Covid, only to see their investments drop. This approach can lead to overinvestment in recognizable but potentially overvalued companies, potentially missing out on better opportunities.
Home Bias
Gertjan Verdickt, associate professor of finance at the University of Auckland, introduces the concept of home bias, where investors tend to favor domestic stocks and companies they are familiar with. This bias can lead to a lack of diversification, which is essential for managing risk. Verdickt suggests that investors should aim for a global portfolio, with international stocks making up about 59% of the market cap weight, rather than the commonly advised 25-30%.
Don't Invest in Your Employer
Another piece of advice to be cautious about is investing in the company you work for. Verdickt emphasizes that this is a risky move, as it concentrates your investments in a single asset. If your employer goes bankrupt, your investments could be severely impacted. This advice, often framed as a way to benefit from the company's success, can be misleading and potentially harmful.
Home as an Investment
New Zealanders often view their homes as valuable investments, but Verdickt argues that this perspective needs reevaluation. An owner-occupied home doesn't provide a significant income and is illiquid. While homeownership can be beneficial, there's little evidence that it's financially superior to renting and investing the difference. This common advice can lead to a dangerous concentration of wealth in a single asset.
Save 10-15% of Your Income
The advice to save 10-15% of your income at every age is often given, but Verdickt challenges this notion. Economists suggest that saving rates should be flexible, adjusting to life-cycle income patterns. Young individuals might have low savings, while those in midlife should save more, and retirees should spend down. This advice ignores the time value of money and can be economically suboptimal.
Emergency Savings and Debt Management
Building an emergency savings account is essential, but Verdickt advises against doing so while carrying high-interest credit card debt. It's economically irrational to have money in a low-interest savings account while paying high-interest debt. Instead, it's better to focus on paying down debt and using available credit when needed.
Timing the Market
Ana-Marie Lockyer, chief executive of Pie Funds, advises against making investment decisions based on short-term market movements or headlines. Timing the market is incredibly difficult, and investors often miss out on the best days of the market. Lockyer recommends a long-term, diversified approach, focusing on a strategy that aligns with your goals and sticking to it.
Avoid Quick Wins
Lockyer also warns against seeking quick wins or short-term gains. Investing is most effective when it's boring and consistent, diversified, and aligned with your long-term goals. Warren Buffett's quote, 'the market is a way of transferring wealth from the impatient to the patient,' highlights the importance of patience and a well-thought-out strategy.
In the world of investing, it's essential to strike a balance between following advice and making informed decisions based on your unique circumstances. While some advice might be widely accepted, it's crucial to critically evaluate it and adapt it to your personal financial goals and risk tolerance.
