You are your enemy when it comes to investment

22 February, 2014

When it comes to investment, the investor himself is his worst enemy. The biggest threat for any investment manager or individual investor is not losing money. The threat is the difference from the peers. When they feel that they are standing out from the crowd, they tend to feel lost. The Telegraph tells people about investing wisely.

Why is differing from peers a threat?

Why it comes to an investment manager, if he stands different from the others and his portfolio loses, then people may question his employability. However, when a share held by all the managers, then there cannot be a mass firing. The same also holds true for individual investors. If five friends decide to sell off a stock, and if you are one of them would be terrified that you might lose more than your peers by holding on to it and you would also sell it off.

How to analyse the output?

If you hold enough shares to track an index with 25 random shares, then output will be very low as transaction cost and manager’s dealing cost will reduce your power and profitability. There are a lot of investors who have withdrawn their savings as their plan would provide the same amount as they had invested as the profits would be balanced by the fee.

Hedge funds

Can this problem be solved by investing in the hedge funds? The answer is ‘no’. The HSBC performance shows that on average, the hedge funds underperform for five years in a row. Groupthink is the reason for underperformance in hedge funds. Owing to this, on average, an investor earns 7 percent less than the market value for the past 20 years.

The other main reason for failure in investment is being too active. The market timing and experience are very essential to gain profit in this game.

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