Since I began investing about 5 years ago, I developed a state of consciousness and conclusion that investors are actually afraid of losing more opportunity losses than actual losses. This conclusion was made through a series of events, including looking at fellow investors’ activities as well as experiencing some of the investing decision myself.
This of course does not simply apply to investing alone. In fact, we see this sort of behavior in almost every aspect of life. We try to keep up with the Joneses, buy diamonds that are bigger, go to vacation destinations that are more exotic than the norm, etc. We are always constantly comparing ourselves with the people we know because we want to be better ahead, even if we are already winning the game ourselves.
We, as investors, regardless of whether we subscribe to the risk taker or risk averse mentality, are aware of the risk of permanent loss of capital that we may be subjected to when we invest. Nevertheless, we still believe that stocks represent a long term investment that can multiply our returns over time. Some of us subscribe to fundamental value investing while the prevalent may be towards more of technical analysis these days. The level of individual activities in investing is of the belief that one can perform better than the average people does and if we compound these returns over time, this can add up quite substantially.
Take bonds for example which are assets that grown to be relatively unpopular in Singapore (as compared to stocks and properties). Most of us know the basic of how bonds work as an assets. As a bondholder, we are essentially providing loans to the government (or companies) and in return we get a fixed percentage of coupon paid to us. The main reason I can think of why bonds are generally unpopular with the community is because they offer a fixed percentage of coupon rate until maturity that are stagnant without accounting any “growth” or “increment”. Again, because we are a bondholder instead of equity holder, we are not entitled to any growth a business owner would enjoy. This was not helped by the fact that in recent years, we have liquidity favoring the equity market because of low interest rates. By using this logic, investors flock to hot assets like property and stocks that provide supposedly higher returns for them and investors do not certainly want to miss out on these opportunities while liquidity is pushing these assets up.
The STI ETF or the Permanent Portfolio structure is another example of proven returns based on a long term historical data available. Investors could simply stick by the simple investing principle and enjoy decent returns over the long run. However, many investors do not choose to do so because they are afraid of losing more opportunity losses if they didn’t invest elsewhere, especially highly driven assets at certain point of time. The high level of individual activities has instead returned them lower returns than these simple investing methods because they aren’t capable beating the system.
This could well go down due to psychological matter and the notion that more activities in investing results in higher returns over the long run. It’s probably akin to going in to a casino and yet you’re spending your precious time playing the slot all night along.
I have not even included people who are in a binary position of all in cash versus all out cash. Talk about the investors from the 2008, 2011 and 2015 I just mentioned in my previous post. Hmm.
Are you like that too? Why do you think investors are more afraid of opportunity losses than the actual losses?