Don’t let a bad experience stop you from investing

Last year on holidays, my son got stung by a jellyfish when swimming in the sea. The lifeguard put vinegar on it and it stung for a while but he was fine. For the rest of the holiday he was apprehensive about going into the sea again. I was telling him he was just unlucky but it wasn’t working. I was looking at it from my point of view. A grown man who has swam in the sea hundreds of time and never gotten stung. My son has only swam in the sea a small number of times (we’re not really beach people; the sand!!) and has managed to get stung. He is judging from a small sample size, so the chances of getting stung again are pretty big to him. Believe it or not, we look at investing the same way.

Bad Experience

I have lost count of the amount of people who have had a bad experience with their investments. While there are plenty of bad investments out there, there are other factors that can taint someone’s opinion on investments, even if the

  • Market timing – You might just be unlucky. We don’t know when the market is at the top and no one rings a bell when it hits the bottom. Say in January 2006, you invested €100,000 in the MSCI World Index for 5 years. At the end of the 5 years, as well as the trauma of seeing your €100,000 fall in value to €58,000, you would have got back €102,860. An annual gain of 0.49% per annum. If your friend came into money a few years later and invested in the same index from March 2009, after 5 years they would have €274,950!! An gain of 18.94% each year for 5 years!!
  • Not understanding the risk involved – The more your money can go up in value, the more it can go down in value. Before the market crash started in 2007, an Emerging Market fund doubled in value in 12 months time. It subsequently fell by -62%. People are blinded by the upside of the phenomenal growth and do not understand how much it can fall too. And when it recovers, it will shoot up but when there is a jitter in the market, it is going to get hit harder. Products with borrowing are especially dangerous as there are lenders that need to be repaid. If the value of the asset is worth less than the borrowings, your investment is worth nothing.
  • Cashing out too early – Unless you are in a fixed term investment (avoid these), when there is a crash, you can always just give the investment more time than you planned to let it recover. Say I stuck it out with my Emerging Market fund, I would have seen my €100,000 fall to €38,780, which is pretty shocking for anyone. Do I cash it out and take the loss? What if I stayed invested in it? It would be worth €157,390 today. That’s an annual return of 3.93% per annum.

Good Experience

As an advisor, I also have to watch out for someone who has had too good an experience with investments. During the Celtic Tiger, when the country was obsessed with property, there were property syndicates being sold all over the place. There was lots of borrowing involved but due cheap lending these deals were closed quickly and with a buoyant economy, it didn’t take too long for an adequate level of profit to be made. Lots of people made a lot of money very quickly. Lots of these properties were not in good locations, there was a huge amount of borrowing, there is no access to your money if you want it and in a lot of cases, the communication and administration is poor. They are not good long term investments, it was riding on the tide of optimism and eventually a lot of people lost a lot of money.

When investing money, don’t let the experience of one bad, or good investment be the deciding factor on what investments are like. People have invested money for centuries and a lot of money is made from investing. Pension funds all invest in different assets, governments are constantly looking for investors to buy their debt. If they all had bad experiences, markets wouldn’t exist. Always look at the underlying assets that you are invested in and understand fully what the risks are with your investment.

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