6 investment contradictions you need to be aware of

In one of my recent newsletter articles, you’d have read about the “paradox of accessibility” – alluding to the fact that massive advances in technology mean that you have a vast amount of information at your fingertips that you don’t really need.

In the same article, I also referred to another apparent paradox, or contradiction, which states that often the best thing to do with your investment portfolio is to totally ignore it for extended periods.

It set me thinking about other investment contradictions that you should be aware of when it comes to investing your money and planning your financial future.

1. Boring is good, excitement isn’t

Index-investing – effectively tracking the performance of either a single stock market or a basket of them – is probably the most unexciting type of investment there is.

It’s so simple and straightforward that it’s generally carried out by a computer algorithm, and there’s little to no fund manager involvement.

Active fund management may well be more interesting, but that’s no guarantee that it’ll produce better results. Earlier this year, a Standard & Poors survey reported by CNBC revealed that less than a quarter of active fund managers outperformed their funds benchmark index.

You should reserve your excitement for sporting events, holidays, and entertainment – not the growing of your wealth.

As Paul Samuelson says: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Taking it a step further, your retirement should be a time of excitement, but not the journey to funding it.

2. Too much choice can be confusing

On the face of it, choice is a good thing. You’d be living in a very dreary and autocratic world if your choice was limited to only one or two items. The “any colour you like as long as it’s black” approach of legendary car manufacturer, Henry Ford, soon lost its attraction.

But sometimes the pendulum swings too far the other way, and the outcome of too much choice can be a source of frustration, especially when it comes to investing.

According to Statista – the number of regulated investment funds exceeded 131,000 in 2021 – nearly double the figure in 2007.

Drilling down further into a single market sector, Citywire analysis shows there are currently 430 funds listed in the UK equity sector.

Within those 226 funds there are a mind-boggling array of names and descriptions. Remember, all of them effectively do the same thing, yet you’ll see them described as special situations, recovery, income and growth, growth, accumulation, multi cap, multi factor, dynamic, and any other number of descriptions, or combinations of them.

Having thousands of different investment funds to choose from doesn’t make it any easier to invest – especially when many of them effectively do the same thing.

3. Fear of loss can guarantee you’ll lose

A sporting analogy best outlines this contradiction for you. If you’re watching a football match on television and a side is one goal ahead, you’ll often hear a commentator or analyst say that they should still be attacking as “the best method of defence is attack”.

In a similar vein, if you’re managing your money with the sole intention of not wanting to lose money, you’re more likely to lose it.

The lowest risk option is often seen as cash. Keeping money uninvested and simply holding it in a bank or savings account results in the purchasing value being eaten away by inflation.

That’s problematic, even when inflation is relatively low. But with the CPI inflation rate now at 10.1% and projected to go even higher, holding excess cash really can be a high-risk strategy given that it will likely decline in purchasing value at an alarming rate.

Any money you need instant access to, such as your emergency fund, should clearly be in an easy access savings account. But you should consider investing any cash that you don’t think you’ll need for five or more years.

4. Over-trading can harm your wealth

In his book, Outliers, Canadian journalist Malcolm Gladwell came up with the “10,000-hour rule”. This posits that to become extremely successful at something takes 10,000 hours of practice and repetition, rather than a lucky break.

The notable example he referenced was of The Beatles and the thousands of hours they spent performing at the start of their career in Hamburg nightclubs.

When it comes to investing, however, the reverse tends to be true. More often than not, trying to trade your way to profits and meddle with your portfolio makes investment loss more, rather than less, likely.

Even the most successful fund managers get it wrong some of the time. That’s why I’d always caution you against following investment “stars”.

5. It doesn’t matter if you’re not sure what’s going on

Up to a point, a certain amount of investment and financial knowledge can be useful. It can make it easier to understand different concepts, ask the right questions, and make the right challenges.

But the key point is that if you don’t know what’s going on, it’s fine – as long as you’re getting expert advice from someone who does.

That’s why advice is so crucial. I wouldn’t know where to start when it comes to servicing my car – that’s why I get an expert mechanic to do it.

Investing is no different.

6. The only certainty is uncertainty

You’re no doubt aware of Benjamin Franklin’s famous quote that “in this world, nothing is certain except death and taxes”.

A logical extension of that truism is that uncertainty is a third certainty.

Uncertainty in investment markets is a fact of life. Markets are affected by unexpected external events and economic cycles.

Share values rise and fall, reflecting business performance and company values. We experience bull markets and bear markets. Likewise different market sectors will have periods of strong growth followed by a decline in value.

It’s important to realise that it’s been like that for hundreds of years, and the key thing is to have a robust investment strategy to deal with all that uncertainty.

Get in touch

If you’d like to talk about investing your money, or want to discuss your current investment strategy, please get in touch.

You can call me on 07769 156 250.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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