Starting your investment journey is hopefully a time full of curiosity to learn new information and motivation to find the best investment strategy for you and your future, and so it should be. However, there are a number of recurring mistakes we see new investors make that if avoided would probably put them in much better stead to achieve their goals had they only had some guidance beforehand.
In this blog post, Sam Harley, Financial Planner at Pyrmont, will discuss the top 5 investment blunders we see new investors make in Hong Kong and how best to avoid them from day one!
“One of the biggest mistakes I see new investors make, which subconsciously everyone has succumbed to at some point, is chasing headlines.
Financial news stories from mainstream outlets are precisely that, stories designed to shock you and get more clicks on more news links, not help you reach your financial goals.
Even well-known news outlets in Hong Kong will publish finance or money articles that contain outright incorrect information with little accountability to readers.
This year’s hot investment news theme of choice could be vastly different from last year’s in terms of risk, asset type, cost and appropriateness for the stage you are at in your journey.
Take the period over the last two years since the start of the pandemic where various asset classes or companies received particularly high levels of airtime in the media.
- 2020 – Individual companies – Tesla, Vaccine Manufacturers
- 2020-2021 – Cryptocurrencies & NFTS
- 2020-2021 – Thematic Funds (E.g., ‘Tech ETFs’)
- Q1 2022 – Interest rates are rising – “property is dead.”
- Q2 2022 – Bonds are back
- Q3 2022 – GBP is down
- Q4 2022 – Cash is king again
I won’t comment on any of the above specifically. The point is that if you jump from headline to headline changing your strategy based on each hot theme of the quarter, you are chasing short-lived investment returns. Not only that, your portfolio could end up as a mishmash of different financial products and an incoherent strategy. Both of which don’t necessarily help you on your way to funding your future lifestyle most effectively or sustainably.
My take? Intelligent, sensible investing that is proved to be effective over the long term rarely makes the headlines. Individual companies, countries and sectors will have good days and bad days. So don’t put all of your eggs in too few baskets.
Don’t seek financial advice from major news outlets that have no duty to act in the reader’s best interest. Seek the help of a professional who can guide you based on your personal circumstances.”
2. Prioritising Low Fees Over Long Term Value
“You won’t need to jump too far down the rabbit hole before you find an online debate or piece of content around minimising investment funds costs or the impact of fees on your investment returns.
One of the biggest investment mistakes is paying zero attention to fees. However, it is crucial that you give costs the right kind of attention.
You must ensure you understand the full extent of fees you’re paying and how they impact your investment, minimising them where possible. But prioritising the lowest fees over all other factors may not necessarily be the best strategy.
For example, one of the cheapest investment funds on the market would be the S&P 500 index which may cost around 0.015% per annum. This contains the 500 largest companies in the US only. Whilst historically, this index has performed well, this is no guarantee of future return.
In contrast, a fund that invests in the whole global stock market, and not only large companies, could cost around 0.12%, which is still considered very low for the industry average and would still contain many, if not all of the companies held in the S&P 500 index.
On a year-by-year basis, it’s impossible to predict which country is going to perform the best. Exposure to a broader range of company sizes, industry sectors and countries is arguably of more value than solely choosing the lowest-cost investment fund.
When investing over the long term, I feel much more confident knowing I am investing in the belief that the world will experience growth and development over time, rather than putting all my money in the largest companies of one country, whether the US or otherwise.Click here to learn more about why global diversification is needed to broaden your investment universe and minimise risk.
In the same light, the method you choose to implement and access your investment, such as an investment platform, will also have associated fees. The cheapest platform on the market may look like the best financial decision. But if that comes with unfriendly technology and a lack of human advice, I would argue that it is much less valuable over time than a solution that offers easy-to-use technology and access to a professional adviser to help you make informed financial decisions. Investing for your future should be a pleasant experience. The lowest cost option doesn’t necessarily equal the best user experience or financial outcome.”
‘My Company Takes Care Of That.’
“Whether it be company share awards, retirement plans, or insurance. Any other forms of remuneration or benefit on top of your salary are, of course, a good thing. However, one big mistake I see young professionals make is not engaging with their company benefits to understand whether they are sufficient for them or even suitable.
When I started working, I was happy to find out that my employer contributed each month to a pension. I made a mistake for the next few years of thinking that would be enough to take care of my ‘retirement’. I didn’t even know what the pension was invested in. When I eventually decided to look at the paperwork, I found that I was invested in the pension provider’s default option, which was probably overly cautious for the amount of time I had ahead of me to invest. I had missed out on potentially higher returns just because I assumed the product the company assigned for would be just fine.
In Hong Kong, whilst your MPF will ensure you are saving a pot for the future, but there are limitations in terms of investment choice, and while your company may be contributing towards it, the level that they contribute is not in your control. It’s not enough to rely on your MPF. Make sure you understand whether you will ave enough for retirement and have a plan alongside this.
Similarly, when companies provide life insurance for their employees, many assume that since the company covers this area, it is sufficient for their needs now and indefinitely. In Hong Kong, it is common for employers to provide life insurance but not cover for being diagnosed with a critical illness. Your company’s life insurance plan won’t adjust as your needs change throughout your life, such as if you have children, buy a property or get married. Also, if your employment ceases, your life insurance plan dies with it. So having your own personal cover in place for both life and critical illness cover is essential.”
Going To The Big Banks
“The bank you use for your main account in Hong Kong will likely also have a wealth management arm offering investment services and other financial products. It’s convenient to access these services, and whilst your friendly relationship manager at your local branch may be well-intentioned, there are inherent conflicts of interest between large publicly traded banks and truly acting in the individual’s best interest.
For example, the fees charged on investment funds offered by the banks are usually much higher and no different than what you can access elsewhere.
Quarterly targets mean that banks are incentivised to generate as much income and commissions as possible in a short time. Banks touting which fund, stock or country will perform well next is a common strategy for switching clients’ investments out of one fund and into another and generating more commissions. Then they start the cycle again in the next quarter.
This might not seem so detrimental initially but trying to predict which fund will perform better than others is incredibly difficult, if not impossible long term, and constantly switching from one strategy to another is a sure way to increase costs for no real value and to end up with a disjointed portfolio.
A fee-based, independent adviser has no financial incentive to change your portfolio over time. Changes should only occur if there is a material change to your circumstances or objectives.”
Combining Insurance With Investment
“One investment mistake that can have long-term financial implications and should be avoided is buying insurance products linked with a savings/investment element.
These are often sold on the premise of their convenient dual purpose – Insurance + savings together, great! However, in practice, the product’s structure means that you end up overpaying for sub optimal insurance and sub-optimal investment. You could face exit penalties if you close the plan within a certain time.
There are cases where at the end of the term, the investment portion ends up much lower than the projected value at the point of sale as it has been used to subsidise the insurance portion.
You would pay much lower annual premiums by keeping insurance separate from investment.
Consider a ‘pure-term insurance policy’ to cover your insurance needs and look into different solutions for your savings, such as an investment platform with no exit fees or penalties.”
If you feel any of the above points apply to you, the important thing is not to panic. Most people have done one or more of the above at some point. You can get back on course with some guidance from an adviser that has your best interest in mind. To start making smarter financial choices, get in touch today.
Capital at risk.